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Issued November 18, 1914. 

U. S. DEPARTMENT OF AGRICULTURE, 

FOREST SERVICE. 
HENRY S, GRAVES, Forester. 



INSTRUCTIONS FOR APPRAISING 
STUMPAGE ON NATIONAL 

FORESTS. 




WASHINGTON: 

GOVERNMENT PRINTING OFFICE. 

1911. 



Issued November 12, 1914. 



U. S. DEPARTMENT OF AGRICULTURE. 

FOREST SERVICE. 
HENRY S. GRAVES, Forester. 



INSTRUCTIONS FOR APPRAISING 

STUMPAGE ON NATIONAL 

FORESTS. 




WASHINGTON: 

•OVERNMENT PRINTING OFFICE. 

1914. 



£M 



"9 



D. OF 0. 
OtC 6 S914 



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CONTENTS. 



Fan. 

Introduction 7 

Purpose and use of instructions 7 

Standard terms 7 

Fixed investment 7 

Depreciation 7 

Residual and wrecking values 8 

Maintenance 8 

Operating costs 8 

General expense 8 

Interest 8 

Working capital 8 

Selling price 9 

Profit 9 

Overrun 9 

Overturn, or cost of production 9 

Principles underlying stumpage appraisals 9 

Basis of appraisals 9 

Requi rements of law 9 

Minimum stumpage rates 9 

Fair profit for the operator 9 

Intensive study of investments and costs 10 

Grouping and standardizing operating costs 10 

Conservative calculations .'-: 10 

Description of logging conditions and methods 11 

Use of appraiser's judgment 11 

Analysis of a proposed operation 11-13 

Fixed investment, depreciation, and residual or wrecking value 13 

Inclusion of all necessary investments 13 

Commissaries and boarding houses 13 

Mill sites and rights of way 13 

Size and type of plants 13 

Borrowed and unborrowed capital 14 

Classification of investments 14 

Depreciation of fixed investments 15 

Determination of residual or wrecking value 16 

Amounts of timber upon which investments should be depreciated 

and inclusion of private timber 17 

Valuation of existing improvements 18 

Determination of average investment 18 

Use of average manufacturing costs and depreciation 18 

Profit bearing period of investments 18 

Interest charges on preliminary investments 18 

Calculation of annual depreciation and average investment 19 

By separate years 19 

By separate investment items 21 

3 



4 CONTENTS. 

Principles underlying stumpage appraisals — Continued. Page, 

Operating costs 24 

Standard classification 24 

Need for ascertaining all costs; use of conservative figures 26 

Checks from jobbing rates and going operations 26 

Extra costs of Service requirements 27 

Basis of computation 27 

Distinction between operating costs and fixed investments 27 

Maintenance 27 

Selling costs 28 

Taxes and insurance 28 

General expense 28 

Working capital 28 

Elements in working capital 28 

Variation in different operations 29 

Frequency of the turn 29 

Working capital required for — 

Taxes and insurance 29 

Accounts receivable 29 

Determination of working capital 29 

Working capital in slow operations 30 

Calculation of working capital from average stocks on hand 31 

Working capital in sales of special products 31 

Overrun 32 

Source of overrun 32 

A necessary factor in stumpage appraisals 32 

Determination of overrun 32 

Log scale the final basis in calculations 33 

Lumber and log selling prices 33 

Appraisals based upon lumber selling prices 33 

Average selling price of various grades 33 

Average selling price of mixed stands 34 

Lumber prices prevailing in producing regions 34 

Lumber prices during normal market conditions 34 

State of manufacture and shipment 34 

Value of by-products 35 

Prices of other products than lumber 35 

Use of log prices as a check 35 

Profit 35 

Profit margin in stumpage appraisals 35 

Elements in profit 36 

Interest on investment 36 

Reward for personal effort 36 

Business risks 36 

Methods of reckoning profit 38 

Checks on profit calculations 39 

Application of the investment method 40 

Application of return for personal services 42 

Application of the overturn method 42 

Distribution of profit and depreciation in mixed stands 44 

Prorated on quantity of timber 44 

Prorated on net value of timber 44 

Stumpage price 46 

How obtained in mixed stands 46 

Flat rates not desirable 46 



CONTENTS. 5 

Principles underlying stumpage appraisals — Continued. 

Stumpage price — Continued. Page. 

Use of minimum stumpage rates 46 

Distribution of loss on inferior species 46 

Trade valuation of inferior species 46 

Stumpage prices for special products 47 

Appraisals for small sales 47 

Small operations irregular 47 

Appraisals based on methods in use and prices actually obtained 47 

Liberal profits required 47 

Small operations competing in general markets 47 

Schedules of prices for small sales 48 

Safeguards and checks 48 

Check by appraiser's judgment 48 

Check by money profit per M feet 48 

Prices bid in former sales 48 

Current stumpage appraisals 48 

Prices of private timber 48-49 

Methods of appraising stumpage; application of principles adopted 49 

Symbols for elements in appraisal 49 

Examples of the investment method 49 

A small operation in the Rocky Mountains 49 

A middle-sized operation in the Blue Mountains 52 

A large operation in the Idaho Panhandle 55 

Examples of the overturn method 62 

Small shortleaf-pine operations in Arkansas 62 

A logger's sale in northern Montana 63 

A sale of tie and mining timber in Wyoming 65 

Appendix — Form for summarizing the essential data in a stumpage appraisal ... 70 



INSTRUCTIONS FOR APPRAISING STUMPAGE ON 
NATIONAL FORESTS. 



INTRODUCTION. 

Purpose of Instructions. 

These instructions are meant to standardize the principles and methods followed in 
stumpage appraisals upon National Forests. They bring together the results of the 
experience and study of many Forest officers, but are not final, and will be revised 
from time to time as further experience is gained. They should, however, be applied 
in all appraisals, both ( 1 ) to secure uniform practice throughout the Forest Service and 
(2) to develop this phase of sales work by joint use and study of the same methods. 
One of the methods indicated will therefore be used in every stumpage appraisal. 
Other methods may be used, as desired by the appraising officer, and the results 
reported as a check upon the standard methods. Suggestions for modifications or addi- 
tions to these instructions should be submitted to the Forester. 

Use of Instructions. "gggggj^'jS 5= 

|8 These instructions supplement the Timber Sales Manual. They will govern the 
appraisal of stumpage in timber sale, timber settlement, timber trespass, and free use 
business, and in land exchange projects. They are for the exclusive use of Forest 
officers and will not be furnished to persons outside of the Forest Service. 

STANDARD TERMS. 

For uniformity in appraisal reports and discussions the following terms will be used 
with the meanings here given: 

Fixed Investment. 

Fixed investment, as applied to lumbering operations, is the money expended in con- 
structing or acquiring the operating plant. It comprises not merely buildings, rail- 
roads, and woods improvements, but machinery and equipment, such as cars and 
locomotives, donkey engines, and teams. It includes the replacement of worn-out 
structures or equipment which must be renewed during an operation. Fixed invest- 
ment, as distinct from working capital, is the outlay for land, structures, and equip- 
ment, which can be recovered only in a considerable period of time as portions of the 
cost of the plant are returned from the business and charged off in its accounts. 

An initial fixed investment is the expenditure for these purposes required at the be- 
ginning of an operation, to start production at the normal capacity of the plant. A 
subsequent fixed investment is any later outlay for the extension or renewal of improve- 
ments or equipment. 
Depreciation. 

Shrinkage in the value of fixed investment is called depreciation. At the end of an 
operation the buildings, transportation improvements, and equipment are valueless 
or worth but a portion of their first cost. Depreciation is thiB decrease in the value of 
fixed investments which must, in one form or another, be restored to the original capital 
from the proceeds of the business. 



8 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

Residual and Wrecking Values. 

Fixed investments may have some value at the end of* an operation. If this value 
exists because of opportunity for continued use in place, as where additional blocks of 
timber are available to a partly used mill, it is known as residual value. If the value 
is only for removal and use elsewhere, or for sale as scrap, it is known as urecking value. 

Residual or wrecking value is equivalent to first cost less depreciation. As the 
amount of depreciation is decreased, residual value approaches the original investment 
and may nearly equal it in the ease of railroads and other permanent structures. 
Investments in the lumber business, however, are seldom maintained at a constant 
capital value, as is frequently the case in industries of a more permanent character. 

Maintenance. 

Maintenance includes all charges for the upkeep and repair of fixed investments. It 
is an operating cost, consisting of labor, materials, and new parts of equipment used 
in repairs. Unlike depreciation, maintenance bears no relation to the cost of fixed 
investments. It is a current charge, like felling or skidding, for keeping buildings, 
structures, machinery, and tools in condition for doing the work for which they were 
designed. Any expenditure which serves simply to keep a structure or piece of 
equipment up to its original and intended capacity will be regarded as maintenance. 

No arbitrary line need be drawn between maintenance and fixed investment in the 
matter of replacements. The replacement of complete units like locomotives or 
donkey engines is ordinarily regarded as a subsequent fixed investment. The replace- 
ment of mill machinery is usually charged as maintenance. The replacement of short- 
lived equipment, such as steel cable, is ordinarily carried as a current operating cost. 
Local trade practice should guide the treatment of such items in National Forest 
appraisals. 

Operating Costs. 

Operating costs consist of all expenditures in an operation except for stumpage and 
fixed investments. They are the current charges for labor, supplies, and other ex- 
penditures required in logging and manufacturing, from stump to car. They include 
maintenance, taxes, insurance, and general expense. 

General Expense. 

General expense is a convenient term to designate the operating costs which are not 
related to any distinct and recognized step in logging or manufacture. It includes 
supervision of the operation as a whole, office expenses, selling costs, and such mis- 
cellaneous items as cruising and fire protection. It does not include taxes and insur- 
ance, which are sufficiently specific to be treated separately. 

The term overhead charges is frequently used in the trade to designate expenditures 
of this character. General expense is preferred as a more applicable term. 

Interest. 

As used in Forest Service appraisals, interest is neither one of the regular costs nor 
a part of the returns from the business. Interest on invested capital at any fixed rate 
will not be included in the cost of production, and all returns will be shown in one 
place as profit. The term will be used only to mean interest on money invested in 
improvements during the period before cutting begins, which will be made part of 
the fixed investment as computed on the date when logging commences. 

Working Capital. 

Working capital is the money which must be available to pay for stumpage, labor, 
supplies, insurance, and other current expenditures in the operation. It includes 
most of the operating costs, but excludes any sums expended for fixed investments. 
Working capital can usually be regarded as a constant fund drawn upon from time to 
time for operating costs and replaced by a portion of the receipts. 



APPRAISING STUMPAGE ON NATIONAL FORESTS. U 

Selling Price. 

Selling price is the average mill-run value of the product of an operation per thousand 
board feet or other unit. In lumber production it is the average invoice price of the 
various grades manufactured f. o. b. cars at the mill or nearest common-carrier ship- 
ping point. With other products, it is the average price of all grades and sizes at the 
point, usually represented by common-carrier shipment, where the specific operation 
dealt with in the appraisal terminates. Selling price should ordinarily be taken as 
the average price at which the product is billed less actual freight, or scheduled 
freights with underweights adjusted. 

The average selling price of a species or a tract of timber is the average price of all 
grades and sizes of the manufactured product. This product may include a con- 
siderable variety of form and finish. As a standard practice, factory products and 
the higher forms of finish will not be included unless necessary to arrive at a satisfactory 
valuation. 

Profit. 

Profit is the money returned from sales of the product over and above deprecia- 
tion of fixed investments, operating costs, and payments for stumpage. Profit must 
be distinguished from a margin for profit. The latter is the profit element used 
in Service appraisals. Aside from the actual profit estimated as due the operator, 
it includes a surplus to cover unforeseen losses and risks. The margin for profit may 
be calculated as a percentage return on the money invested, a given amount per unit 
manufactured, or a percentage of the total unit cost of production. 

Overrun. 

Overrun is the difference between log scale and lumber tally at date of sale, on the 
same quantity of material in the log. It results from the inaccuracies of log scales, 
and particularly the use of thinner saws since the prevailing scale rules were devised, 
from closer utilization of short lengths and narrow widths, from cutting dimension 
stock instead of inch boards, and other features of manufacture. Overrun is com- 
puted as a percentage increase on the log scale, an overrun of 10 per cent meaning that 
1,000 feet log scale will cut 1,100 feet of lumber. 

Overturn or Cost of Production. 

The overturn is the total production cost of each thousand board feet log scale or 
other unit. It includes depreciation and all operating costs. Overturn plus profit 
and stumpage price equals the selling price of the manufactured product. 

PRINCIPLES UNDERLYING STUMPAGE APPRAISALS. 

BASIS OF APPRAISALS. 

Market Value Required by Law. 

The act of June 4, 1S97, provides that National Forest timber may be sold at "not 
less than the appraised value." In applying this requirement, the aim of stumpage 
appraisals will be to ascertain the existing market value of the timber. 

Minimum Stumpage Rates. 

Minimum rates for each species are established by the Forester for every Forest 
area which has the same general market and manufacturing conditions. They con- 
stitute upset prices for use in all stumpage appraisals. 

Fair Profit for Operator. 

Subject to the minimum rates, National Forest stumpage will be regarded as worth 
the selling value of its product less all costs of producing it and a fair margin for profit 
to the operator. Appraisals should not offer large speculative profits. Operators on 
National Forests must be willing to cut and manufacture stumpage for a fair return, 



10 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

representing compensation for time and ability and an industrial rate on the capital 
required, which is protected by a reasonable margin against unforeseen losses. Profit 
is not guaranteed by the Forest Service; but the basis of all appraisals is a margin 
between cost and selling price under normal industrial conditions which will satisfy 
a prudent operator, his business situation and the advautages of buying Government 
stumpage being considered. 

It must not be overlooked that this margin is not a clear or even a probable return 
to the operator. A portion of it covers the risks incident to practically every lumber- 
ing operation. These are the possible and unforeseen losses which can not be provided 
for in the appraisal, including the large element of chance in the lumber market. 
But a part of the estimated margin will normally be netted to the purchaser as actual 
profit. (See p. 41 for a discussion of rate3 of profit.) 

Intensive Study of Investments and Costs. 

National Forest stumpage must not be appraised by adopting current local prices, 
by uniform rates on the same Forest, or by guess work or hasty assumptions. Ap- 
praisals should, on the contrary, be based upon intensive study of investments, costs, 
and profits in each specific case. Each chance presents a problem in itself. All of 
its elements must be worked out as fully as practicable, in accordance with the ap- 
praiser's judgment of the most logical and efficient means of exploitation. 

Every necessary outlay of money should be caught up as far as possible and given 
proper weight. It is important not to overlook the less obvious investments or costs, 
auch as interest on preliminary improvements, superintendence, and the cost of em- 
ploying and insuring labor. Equally thorough consideration should be given to all 
sources of income. It must not be assumed that certain costs will be offset approxi- 
mately by certain indefinite returns and hence that both can be eliminated from the 
calculation. The effort of the appraiser should be to work out accurately all expendi- 
tures and returns in the specific case before Mm. 

Exceptions to this rule will be permitted only in the case of small sales on parts of 
Forests having substantially the same conditions, for which schedules of stumpage 
prices have been established by supervisors under authority from the District Forester. 
(See "Appraisals for small sales," p. 47.) 

Grouping and Standardizing Operating Costs. 

An analysis of the operating costs on each chance is essential in appraising ita 
stumpage. As data on more operations and chances in the region are obtained and 
compared, however, it may become possible to standardize cost items or groups of 
items at figures generally applicable to going conditions in the industry, or to local 
types of logging or milling. These standards should be conservative, particularly 
with regard to fluctuations in operating costs from year to year on the same job. When 
accurately obtained, standard costs for specific items, like maintenance of logging 
equipment, or complete steps, like logging to rail or manufacturing, may be used if 
study of the chance indicates that they are applicable. Manufacturing costs for mills 
of each type and capacity are especially adapted to standardization. In any event 
standard costs form an excellent check on the calculation. 

Calculations Must be Conservative. 

Calculations should be conservative, based upon average rather than maximum 
efficiency in the region. Logging costs ordinarily vary 10 or 15 per cent from average 
figures because of the varying ability of different operators who may all be good, 
practical loggers. As a standard rule, costs should be based upon the work of the 
average operator rather than that of either the most or the least efficient. It is also 
important to allow for the usual fluctuation in operating costs from year to year on the 
aame piece of work, by checking costi in going operations over several seasons. Con- 
servative calculations are of special importance in small sales. (See p. 47.) 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 11 

Description of Logging Conditions and Methods. 

It is necessary not only that the appraiser satisfy his own judgment in fixing stump- 
age rates, but also that of the officer who passes upon his findings. To this end, a 
concise description of the controlling topographic, forest, and industrial conditions 
and a brief account of the methods of operation proposed should be included in ap- 
praisal reports. This may be greatly condensed, but should include enough to ex- 
plain and justify the calculations, particularly as regards the grade and value of the 
product and the investment required. 

Use of Appraiser's Judgment. 

It is the business of tne appraiser to apply these instructions to the conditions on the 
particular chance and report the results obtained. It is fully as important, however, 
that he check such results by his own judgment and business sense. He should 
consider fully other factors which ought to be taken into account in fixing prices, 
such as comparison between different chances or rapid deterioration of the timber. 
He should report definitely what in his judgment the prices Bhould be, wholly inde- 
pendent of the calculation under these instructions, giving plainly the facts or con- 
siderations influencing this judgment. (For an extended discussion of this point see 
"Safeguards and checks," p. 48.) 

The same applies to the use of other methods of appraisal which are believed to be 
sounder in principle or more applicable to the case in hand. First carry out the 
prescribed calculation to a definite conclusion. Then offset against it the results 
obtained by other methods with the reasons supporting them. 

ANALYSIS OF A PROPOSED OPERATION. 

Boundaries and Cut of the Chance. 

The discussion of principles and methods will be facilitated by a bird's-eye view 
of the appraiser's work. After the estimate and topographic map are completed, the 
first steps are to determine the boundaries of the sale area, eliminating unmerchantable 
timber and ground on which logging is impracticable; the proportion of each species 
which can be cut under the methods of marking established for the chance or forest 
type; and the estimated cut by species and lumber grades. 

In defining the boundaries of the cutting, it is necessary to approximate the amount 
of additional National Forest stumpage which will logically be handled by the same 
improvements; and also the private stumpage which is under the control of a pros- 
pective purchaser or may be obtained by him and which forms part of the same chance. 
These factors directly affect the layout and depreciation of fixed investments and may 
bear upon the timeliness and desirability of the sale. 

Most Important Factors. 

The factors whose careful working out is then most essential to an accurate appraisal 
are: 

(1) The quality of the timber and value of its product. 

(2) The investment required, involving a grasp of current lumbering methods 

and equipment and of the topographic layout and plan of operation. 

(3) Operating costs. 

The grade of the product, judged in the light of local milling and marketing practice, 
is probably the single factor of greatest importance affecting stumpage values in large 
Bales. 

Layout of the Operation. 

It is first necessary to decide upon the general methods of logging which should be 
employed, the size and type of manufacturing plant, if one is required, and the size, 
annual output, and duration of the operation. The location of the main artery of log 
transportation, whether by railroad, drivable stream, sleigh road, or flume, then follows; 



12 APPEAISING STUMPAGE ON NATIONAL FOKESTS. 

and the projection of its principal feeders, such as logging spurs, chutes, pole and other 
roads, forming the complete system of log transportation. Next to judging the quality 
of stumpage, this grasp of the layout of logging improvements is the most important 
requisite of accurate valuation. 

From the approximate location of landings or banking grounds on the main line of 
transportation or its feeders, the appraiser should block out the chance into logging 
units for which costs from stump to landing need to be computed separately on account 
of variations in the character of the ground or timber. 

Investments in Logging Improvements. 

The appraiser is now ready to estimate the cost of transportation improvements from 
landing to mill and of logging improvements from stump to landing. Working these 
fixed investments out, unit by unit, he should estimate the initial outlay required 
to put the operation under way; then the additional sums which must be expended 
from time to time as logging is extended into additional blocks. He should determine 
approximately how long each improvement, whether a spur grade, chute, sleigh road, 
or splash dam, will be in use. On a railroad chance, for example, a certain mileage of 
steel rails, picked up and relaid on spur after spur, may meet the requirements of log 
transportation for a considerable period, requiring additions only as the actual mileage 
in use at the same time must be increased to reach the less accessible timber. This 
represents a stable investment continued with little change throughout the operation. 
On the other hand, the cost of grading a spur and laying track for logging out a single 
gulch may be invested for but two or three years, after which the spur is abandoned. 
There may thus be frequent expansions or contractions of the investment in woods 
improvements. 

Residual or Wrecking Values. ' 

The next requirement for the appraisal is the residual or wrecking value of each 
improvement at the end of its use in the sale; hence the annual rate at which the origi- 
nal investment must be depreciated. This leads easily to the investment on which 
profit is due and to the average yearly dejareciation. 

Investments in Equipment. 

The determination of fixed investments, residual or wrecking values, and yearly 
depreciation must be repeated for transportation and logging equipment, such as rolling 
stock, donkey engines, teams, and trucks. The first cost of the various items of ma- 
chinery and apparatus must be ascertained, the rate at which they are worn out, and 
the time when each kind of equipment must be increased or can be reduced as the 
operation is extended over the entire chance. 

Investment in Manufacturing Plant. 

A like computation must be made of investments in land, buildings, and equipment 
for the manufacturing plant where one is required. This is often the most permanent 
part of the enterprise. Its depreciation requires an approximation of the additional 
timber, public or private, which is accessible and should contribute to its operating 
life. 

Determination of Operating Costs. 

The next duty of the appraiser is to estimate the cost of maintaining the various 
parts of the plant in working condition. This is a current operating cost, but from its 
nature must be considered in connection with the character and durability of each 
structure or class of equipment. The calculation ia then ready for the remaining 
operating costs, chiefly labor, for logging, transportation, and manufacture. These 
must include any special or additional costs arising from contract requirements of the 
Forest Service, such as brush disposal or cutting snags. The calculation should be 
carried through all details of the business, however remote from the woods. General 
expenses for superintendence, lumber sales, clerical and other office charges, taxes on 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 13 

Improvements and equipment, on logs in transit and on lumber in the yard, fire 
insurance on the portions of the plant and stock of lumber and logs which are normally 
insured by conservative operators, and liability insurance for injuries to labor are all 
items which must be estimated for in operations to which they apply. 

Determination of Working Capital. 

With the operating costs before him, the appraiser is in a position to approximate 
the working capital, as distinct from fixed investment, which is required to carry the 
business with its current charges and its periodic returns from sales of lumber. This 
involves particularly an estimate of the yard stock which must be carried on hand in 
the normal course of business, or the average length of time during which the costs 
put into lumber must be carried by the operator before he is reimbursed by its sale. 

Lumber Selling Prices and Overrun. 

Finally, the mill-run selling price of each species to be cut must be ascertained 
together with the value of lath, slaba, and any other by-products whose manufacture 
may be practicable. Mill overrun for the class of timber must also be determined 
and costs throughout the whole operation and all return? put in terms of log scale. 

\Yh"n these estimates are reduced tu final ternif, the appraiser will have before him: 

(1) The amount of money required for the business, in fixed improvements and 
equipment and in working funds. 

(2) The part of this capital which must be depreciated; that is, which is not returned 
in tangible assets of some form at the conclusion of the sale. 

(3) The operating costs, in terms of thousand board feet, log scale, from the stump 
to the sale of lumber. 

(4) The value of the lumber and by-products manufactured from the average thou- 
sand board feet, log scale, of each species. 

FIXED INVESTMENT, DEPRECIATION, AND RESIDUAL OR WRECKING 

VALUE. 

Inclusion of All Necessary Investments. 

All investments which will actually be required in logging and manufacturing a 
body of National Forest stumpage should be estimated as closely as practicable in the 
appraisal. Items should not be omitted because of uncertainty a= to the methods of 
Operation which will be adopted by the purchaser. All improvements and equip- 
nit nt necessary in the judgment of the appraiser for the most logical handling of the 
stumpage should be included. 
Commissaries and Boarding Houses. 

Commissaries and boarding houses are usually conducted as independent enter- 
prises, on a separate cost-paying or revenue-producing batis. They seldom form an 
integral part of lumbering operations. Investments in buildings, and equipment 
f or these purposes which it is practicable to segregate will not ordinarily be taken into 
account in stumpage calculations. They may be included, however, if these features 
of the business are not handled independently. 

Mill Sites and Rights of Way. 

Expenditures for mill sites and rights of way are legitimate investments and should 
be included in the appraisal. Mill sites may have a speculative value apart from 
what they are worth for manufacturing lumber. This should be disregarded as far a 
possible, and the investment based upon a fair appraisal of the land for milling only. 
Mill sites will not ordinarily be depreciated, ae it may fairly be assumed that the unim- 
proved ground wJl have the Bame value at the end of the operation as at its beginning. 

Size and Type of Plants. 

It is the policy of the Forest Service to favor small and medium-sized operations aa 
far as practicable. Selection of the size and type of plants and investment calculations 



14 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

will be baaed upon such operations wherever they are practicable, and ako upon 
methods of logging and manufacture tried out and established in the locality. Within 
these limitations, the investments taken should be based upon the most logical and 
efficient methods of exploitation. This applies to the size, type, and output of saw- 
mills, the character and amount of logging equipment, and the nature of logging im- 
provements. If larger operations are clearly the most practicable and logical, stump- 
age prices must be appraised accordingly. (See "Appraisalo for small sales," p. 47.) 

Borrowed and Unborrowed Capital. 

No distinction should be made between investments of borrowed and unborrowed 
capital. For the purpose of stumpage appraisals, capital obtained by credit does the 
eame work and is entitled to the same return as capital owned by the operator. The 
cost of obtaining capital is one of the elements entering into the margin for profit; and 
where this co>.t is high, as in the case of excessive local interest rates, the profit margin 
may properly be increased. (See p. 41.) 

Classification of Investments. 

The following classification of fixed investments will serve as a general standard for 
the Forest Service. Not all of the items will be required in every appraisal, and fur- 
ther subdivisions may be desirable in the more intensive and detailed calculations. 
The classification should thus be adjusted to fit special conditions, while preserving the 
main headings and their arrangement. 
I. Investment — Logging. 

(1) Logging improvements— Stump to landing — First cost of — 

a. Chutes. 

b. Roads. 

c. Slides. 

d. Landing improvements, or 

e. Other structures used in skidding, hauling, or landing. 

(2) Logging equipment — Stump to landing — First cost of — 

a. Teams. 
6. Sleds. 

c. Big wheels. 

d. Bummers or go-devils. 

e. Donkey engines or steam skidders. 
/. Overhead steam appliances. 

g. Steam or horse loaders. 

h. Woods tools, and 

i. Any other logging equipment or appliances. 

(3) Transportation improvements — Landing to mill, or mill to railroad 

shipping point — First cost of — 
a. Railroads, including — 
(a) Spurs and sidings. 

(6) Roundhouses, coal bunkers, tanks, and other permanent 
structures. 
6. Flumes. 

c. Stream Improvements. 

d. Roads, or 

e. Other transportation improvements. 

(4) Transportation equipment — Landing to mill, or mill to shipping point — 

First cost of— 

a. Railroad rolling stock, track tools, etc. 

6. Marine equipment, tugs, bateaux, etc., and driving tools. 

c. Teams, trucks and harness, sleighs, traction engines or other 
equipment, including hand tools, used in transporting timber 
from landing to mill, or mill to shipping point. 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 15 

I. Investment — Logging— Continued. 

(5) Wooda campa and other buildings, together with water system. 

(6) Camp equipment — 

a. Kitchen and mess equipment. 

6. Bedding, heating equipment, and camp fittings. 

(7) Repair equipment — Carpenter, blacksmith and mac h ine shops, etc. 
II. Investment — Manufacturing: 

a. Site. 

6. Pond and dam; other site improvements. 

c. Sawmill. 

(a) Building. 
(6) Equipment. 

(c) Power. 

(d) Lath mill, etc. 

d. Finishing plant. 

(a) Building. 

(&) Equipment. 

(c) Power. 
t. Dry kiln. 
/. Waste burner. 

g. Sheds, docks, platforms, pile bottoms. 
h. Office and miscellaneous buildings. 
t. Yard equipment. 
j. Light, fire protection, etc. 

Depreciation of Fixed Investments. 

Depreciation is the shrinkage in the value of fixed investments on account of reduced 
utility or worth. Loss of value may be due to ordinary wear and (ear, physical 
deterioration, or inadequacy for the current needs of an operation ; or to the exhaustion 
of available timber supplies. In theory depreciation is a certain amount paid out ol 
the proceeds of the business each year on the investment. The best concrete illus- 
tration is a sinking fund withdrawn from the proceeds of the business at regular 
intervals, deposited in a special account, and used to pay off bonds as they become 
due. In stumpage appraisals depreciation will be reckoned as if charged off and 
withdrawn from the business at the end of each year. It is a sum, prorated over every 
thousand feet of timber cut, which in the course of the operation pays back the reduc- 
tion in value of the fixed investments. 

Rate of Depreciation. 

The rate of depreciation varies widely with the nature of the investment and 
character of its use. It is controlled by different factors in the case of the two main 
classes of fixed investments, viz, improvements and equipment. 

Improvements are stationary structures which can be used only where they are 
built. They include all buildings except portable camps, wagon and skid roads, 
railroad grades, cuts and fills, bridges, splash dams, etc. The rate of depreciation 
of each structure or improvement depends primarily upon the amount of timber 
which it can profitably be used to log. Its life is fixed by the time required to log 
the stumpage available. If all of the tributary timber is taken out during a particular 
sale, the improvement will have no residual value. Other structures favorably 
located with reference to large supplies of timber, like sawmills and logging railroads, 
may have a very long life. Their rate of depreciation will be correspondingly slow. 

Equipment, on the other hand, can be moved from place to place. It includes 
tools, steam logging machinery, cables, railroad steel, teams, and rolling stock. Its 
depreciation depends primarily upon its resistance to wear and tear, or the length of 
its ordinary working life. Current industrial experience is the safest guide in calcn- 



16 APPBAISING STTJMPAGE ON NATIONAL FOEESTS. 

lating the depreciation of equipment. The average working life of logging teams, for 
example, is commonly reckoned as 5 years. Steel rails are usually rated at a service 
of 20 years; but their depreciation during the first 10 years is at a much slower rate 
than during the second decade. This is on account of the market for second-hand 
rails which have been used but a few years. Donkey engines, on the other hand, have 
a very unstable value after any period of use, and must be depreciated more rapidly. 
The usual life of sawmill equipment is put at 20 years, but can be extended with higher 
charges for maintenance. 

Calculation of Depreciation. 

Depreciation is usually reckoned as an annual percentage of the total shrinkage in 
the value of the investment. This is frequently termed " straight line" depreciation. 
A donkey engine with a life of 8 years and no value at the end of that time is thus 
reckoned as depreciating 12$ per cent of its first cost every year. A logging chute 
which can be used three years and will have no value thereafter will necessarily be 
depreciated 33J per cent annually. A sawmill costing $30,000, to be run for 10 years 
and valued at $10,000 at the end of that period, will depreciate 10 per cent of the differ- 
ence annually, or $2,000. 

The standard method followed in Forest Sendee appraisals will be to determine: 

(1) The shrinkage in each item of investment from first cost to residual or wrecking 
value at the end of the operation, or whenever it goes out of use. 

(2) The annual depreciation — that is, the total shrinkage divided by the number of 
years in the operation. If an investment is in use but part of an operation, its depre- 
ciation is thus averaged for simplicity over the whole period instead of the years of 
actual service only. 

(3) The depreciation charge per thousand board feet log scale or other unit, found 
by dividing the annual depreciation by the yearly cut. Depreciation will always be 
prorated on log scale rather than mill tally. The same result is secured by dividing 
the total depreciation of the investment by the entire estimated cut. 

As indicated on page 20, a closer calculation may be used where the rate of depre- 
ciation varies from year to year, but for ordinary appraisals " straight line" deprecia- 
tion is sufficient. 

Determination of Residual or Wrecking Value. 

Residual or wrecking value is an uncertain factor. It should be used only where such 
a value will unquestionably exist at the end of the operation or sale contract. If no 
additional timber can be handled by the plant, it is obvious that a wrecking value only 
will remain. Railroads which will become common carriers with permanent traffic 
other than timber form the only exception to this rule. Railroad investments under 
such conditions can usually be regarded as not depreciating but as having a residual 
value equivalent to their first cost. 

Where Other Timber is Available. 

Where additional bodies of stumpage are available, a residual value should be cred- 
ited to the fixed investments. It will ordinarily be the sum of (1) a proportion of the 
total depreciation similar to that which the remaining timber bears to the entire 
original stand, and (2) the wrecking value at the end of the operating life of the plant. 
To illustrate: 

A mill is to be built costing $35,000 and capable of 15 years' operation at an annual 
capacity of 20,000,000 feet. The estimated value of the site and scrap value of equip- 
ment is $5,000, making the total depreciation $30,000. A proposed sale of 160,000,000 
feet will supply it to capacity for eight years. 

(1) If 140,000,000 feet of additional timber is available, or 7 years' cut, the residual 

140 
value of the mill at the expiration of the sale will be ^X$30,000+$5,000, or $19,000; 

and its depreciation in 8 years $16,000, or $2,000 annually. 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 17 

(2) If the available timber totals but 80,000,000 feet, or 4 years' additional cut, the 

80 
residual value will be ^77. X$30,000+$5,000, or .$15,000; and its depreciation in 8 years 

$20,000, or $2,500 annually. 

The same process is applicable to investments in a railroad spur, wagon road, splash 
dam, or any other single logging improvement. 

In lieu of a mathematical valuation, a business appraisal may be placed upon the 
plant at the expiration of the sale, "based upon the probable conditions controlling its 
future operation or value in place. 

Amounts of Timber upon which Investments should be Depreciated. 

As far as practicable, it is the policy of the Forest Service to base depreciation upon 
the full operating life of the structure or equipment as fixed by normal industrial 
standards. Many timber sales are made for short periods which represent but a part 
of the efficient life of the mill, railroad, or other improvements. Future sales to such 
plants can not be guaranteed. The operator must protect himself in competition with 
other bidders for remaining blocks of stumpage tributary to his improvements. It is, 
however, the policy of the Forest Service to reserve from sale additional bodies of 
timber tributary to plants constructed in connection with short-term contracts until 
the initial chance is cut out. As far as practicable such reservations will be sufficient 
to insure the plant a normal operating life. Where additional National Forest timber 
is available, whether specifically reserved by the terms of sale or not, it should bear 
a proportionate part of the total depreciation of the plant. 

Inclusion of Private Timber in Reckoning Depreciation. 

Private timber which it is reasonable to believe the operator will handle and so 
located as to be most logically and economically logged by the same set of improve- 
ments should also carry its proportionate part of the total depreciation. This will hold 
whether the operation is chiefly in private timber, the purchase of small tracts of 
Government stumpage being a secondary feature, or whether a National Forest sale 
forms its principal supply and small quantities of private timber are available which 
it is reasonable to suppose the operator can secure. The bearing of private stumpage 
upon the depreciation of investments must therefore be carefully weighed. 

Depreciation in Sales to New Plants. 

If new mills or other improvements are to be constructed, a reasonable life in accord- 
ance with prevailing industrial standards will be allowed where sufficient Government 
timber, or private timber which there is reasonable likelihood of obtaining, is avail- 
able. The total depreciation of improvements which can be used in logging and 
manufacturing such additional timber will be distributed over the entire amount of 
stumpage thus roughly blocked out to obtain the depreciation charge per thousand 
board feet. 

Relation of Depreciation to Residual Value. 

Extension of the depreciation over additional stumpage, aside from that on the sale 
area, is equivalent to calculating a residual value at the end of the first operation. 
In addition to the wrecking or scrap value of the plant at the end of its operating life, 
this residual value is a proportion of the total depreciation similar to that which the 
remaining available timber bears to the entire original stand. The determination 
of residual value thus has an important bearing upon depreciation. 

Investment and Depreciation in Sales to Existing Plants. 

In sales to existing plants all improvements and equipment which will be used in 
the operation should be given a fair valuation. This applies fully as much to existing 
mills or partially used improvements as to new investments. In many cases an estab- 
lished operator with mills or improvements logically placed for exploiting the chance 
60813—14 2 



18 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

is a probable bidder. The fixed investment in such appraisals should be a valuation 
of existing improvements, with such additions as may be required for extensions or 
repairs. This conforms with the practice of allowing a residual value in sales to new 
plants which will command additional bodies of stumpage. In fact, the residual 
value of the established plant, with any further investments necessary, should be the 
basis of such appraisals. 

Valuation of Existing Improvements. 

The residual value of existing improvements is their sale value whenever obtainable. 
Otherwise, their first cost may be estimated and an operating life as fixed by industrial 
requirements and the amount of available timber. The wrecking value of any im- 
provements at the end of the operation should be considered as in sales to new plants. 
From the estimated first cost, operating life, and wrecking value a fair annual depre- 
ciation can be readily obtained. 

Short-cut methods of determining the residual value of existing plants, such as taking 
one-half or two-thirds of their first cost, may be used when justified by recognized 
practice. One-half the first cost of secondhand mills and other improvements in 
serviceable condition is usually a fair assumption, since it represents their average 
value throughout the total period of use. 

Where Several Plants are Competitors. 

When several existing plants are possible competitors for a chance, the residual 
value used in the appraisal should represent a fair average of the available improve- 
ments of the usual and efficient type. This may be calculated from (1) an average 
initital cost, (2) an average operating life, and (3) an average period of use prior to the 
purchase of Government stumpage. This process may be simplified where substantial 
accuracy can be secured by taking a fair proportion of the first cost of any local plant 
of the size and type required to handle the National Forest chance. 

Determination of Average Investment. 

Average investments in such operations upon which profit is calculated should be 
computed as indicated on page 22, starting with the residual value of the improvements 
at the date when National Forest timber is purchased. 

Use of Average Manufacturing Cost and Depreciation. 

The foregoing is a general guide and statement of policy in sales to existing plants 
rather than an inflexible rule. In regions where manufacturing costs have been 
standardized by types of mills, and average figures covering the total cost of manufac- 
ture, depreciation included, are applicable within safe limits, they may be used in 
appraisals. 

Profit-Bearing Period of Investments. 

Fixed investments are seldom made in one lump at the outset of an operation. 
They usually begin in advance of cutting, depending upon the amount of preliminary 
construction which is required. In operations of any size and length additional 
investments become necessary from time to time, for railroad extensions, road or 
chute construction, more logging equipment, and the like. The replacement of 
major items of worn-out equipment, such as teams, rolling stock, and steam logging 
machinery, is an additional fixed investment. (See p. 7.) Many investments, 
furthermore, are used during only a part of the total operation. 

Interest Charges on Preliminary Investments. 

Interest should be allowed on money invested in improvements for one or more 
years before cutting begins. The interest which has thus accumulated on preliminary 
investments on the date when their use begins will be treated in Service appraisals as 
an addition to the investment itself. Simple interest at 6 per cent will be used 
uniformly. If two years are required for the construction of improvements before 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



19 



beginning cutting, the amounts to be invested each year should be approximated. 
Twelve per cent of the first year's expenditure and 6 per cent of the second year's 
should be added to the estimated investments used in the appraisal. 

Profit Only During Period of Actual Use. 

Investment are entitled to profit only from the date when they are actually made. 
Investments in improvements or equipment which are abandoned or worn out before 
the end of the operation should be cut out of the profit-bearing capital at the proper 
time. Profit on invested money should thus be restricted to the period of its actual 
use. This can be done most conveniently by prorating short-term investments over 
the entire operation in making up the average profit-bearing capital. (See page 21.) 

Calculation of Annual Depreciation and Average Investment. 

Uniform methods of calculating fixed investments and their depreciation are of 
obvious necessity. To this end, standard forms of tabulation will be of service. The 
essential facts to be determined are (1) the average profit-bearing capital at work in the 
business, and (2) the average annual depreciation of the fixed investments. It is of 
special importance to work out accurately the effect upon these two amounts of addi- 
tional investments in improvements or equipment made from time to time and used 
during but a portion of the operation; and similarly of the retirement at various 
intervals of parts of the investment which are worn out or whose use is terminated. 

By Separate Years. 

The most exact method is to carry for each year of the operation (1) the investment 
required at the beginning of the year, (2) its depreciation during the year, and (3) 
additional investments necessary at the end of the year. The estimated depreciation 
during each year is deducted from the investment at its beginning. This figure, with 
the addition of any new outlays required during or at the end of the year, is the invest- 
ment in the business at the beginning of the following year. Thus is obtained the 
profit-bearing capital at the beginning of each year, with the average for the entire 
operation; the depreciation during each year and for the whole period; and the 
wrecking or residual value at its end. 

This is illustrated by the following investments in logging equipment, consisting of 
a light locomotive, gypsy loader, donkey and yarding engines, blocks, and other 
rigging. Ten thousand five hundred dollars worth of machinery will be required for 
the first year's operation. At the end of the first year, $1,200 worth of additional 
equipment rmut be purchased; and at the end of the fifth year $1,800 worth must be 
procured. Th's completes the equipment required for the entire 10 years. All of 
the machinery is depreciated at the rate of 10 per cent annually while in actual use. 

Investment and depreciation — Logging equipment. 



Years. 


Profit- 
bearing 
invest- 
ment. 


Depre- 
ciation 
during 
year. 


Addi- 
tional 
invest- 
ment- 
end of 
year. 


Years. 


Profit- 
bearing 
invest- 
ment. 


Depre- 

eial ion 

during 

year. 


Addi- 
tional 
invest- 
ment- 
end of 
year. 


J... 


$10,500 


$1,050 
1,170 
1,170 
1,170 
1,170 
1,350 
1,350 


$1,200 


8 


5,070 
3,720 
2,370 


1,350 
1,350 
1,350 




2 


10 
9 

8 
7 


650 
480 
310 
140 


9 




3 




10... 




4 




Total 




S 


1,800 


71,430 
7,143 


12,480 
1,248 




6 :... 


7,770 
6.420 


Average annual... 




7 




$1,020 

















The first year's depreciation is 10 per cent of the initial investment, $10,500. The 
second, third, fourth, and fifth year's depreciation is the same amount plus 10 per cent 
of the additional investment of $1,200. The depreciation during the sixth and each 



20 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



subsequent year is the sum of these two amounts plus 10 per cent of the further invest- 
ment of $1,800. 

The wrecking value of $1,020 is the difference between the investment at the begin- 
ning of the last year and the depreciation during that year. This is made up of 10 per 
cent of the $1,200 investment, which was in use 9 years, and 50 per cent of the $1,800 
investment, which was in use 5 years. The average profit-bearing capital represented 
by this equipment is thus $7,143. The average yearly depreciation to be prorated over 
the annual-cut is $1,248. 

Where Depreciation is Irregular. 

This method is of special service in the case of investments whose depreciation from 
year to year is irregular rather than at a uniform rate, or "straight line." The following 
will illustrate: 

In the same 10-year operation, the estimated cost of steel rails, fastenings, and 
switches for the first year's logging is $0,500. Extensions of permanent way and spurs 
for the second year's logging require an additional investment of $2,100; for the third 
year, $1,700; and for the fifth year, $3,200. Further investments are unnecessary 
until the end of the seventh year, when $4,000 worth of additional steel must be 
purchased. 

All of this steel has a life of 20 years. During the first 5 years of use it depreciates in 
value at the rate of but 1 per cent annually; and during the second 5 years at the rate 
of 2 per cent annually. These rates are determined by the local market for "relaying 
rails," first and second class respectively. The annual depreciation charges are thus 
calculated at 1 per cent of each of the several investments during its first 5 years of use, 
and 2 per cent during the remaining period, all items being rounded off to the nearest 
dollar. For the last year, a charge of $1,200 for lifting the steel and removing it to the 
nearest shipping point is included in the depreciation. The profit-bearing invest- 
ment at the beginning of each year is figured as before by adding the new investment 
at the end of the preceding year, if any, and deducting the depreciation during that 
year. 

Investment and depreciation — Railroad steel. 



Years. 


rrofit- 
bearing 
invest- 
ment. 


Depre- 
ciation 
during 
year. 


Addi- 
tional 
invest- 
ment — 
end of 
year. 


Years. 


Profit- 
bearing 
invest- 
ment. 


Depre- 
ciation 
during 
year. 


Addi- 
tional 
invest- 
ment — 
end of 
year. 


1 


$0,500 
8, 535 
10,149 

io. air. 

13. 143 
13.008 
12.808 


$05 
86 
103 
103 
135 
200 
221 


$2,100 
1,700 


8 


$10,587 
16.309 
16.031 


$278 

278 

1,510 




2 


9 




3 


10 




4 

6... 


3.200 


Total 




123.110 
12,312 


2,979 
298 




6.. 




Average annual. . 




7 . 


4,000 


$14,521 











The wrecking value consists of — 

85 per cent of the first investment $6, 500 

87 per cent of the second investment 2, 100 

89 per cent of the third investment 1, 700 

93 per cent of the fourth investment 3, 200 

97 per cent of the last investment 4, 000 

Less cost of putting the steel on the market at the end of the operation 1, 200 

Where Successive Investments of Varying Life are Made. 

The method may be further illustrated by the outlays for constructing roadbed, 
placing ties, laying steel, and ballasting in the same 10-year operation, improvements 
which are abandoned in the course of logging and hence must be wholly depreciated. 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



21 



The estimated cost of roadbed , ties, and laying steel for the first year's logging is $-1 ,500 . 
This portion of the railroad will be in use throughout the entire operation. Subsequent 
investments in roadbed, ties, and labor for laying rails, with the estimated period of 
use in each instance, are as follows: 



Years. 


Invest- 
ment. 


Period 
of use. 


Years. 


Invest- 
ment. 


Period 
ol use. 




$1,800 
1,100 
1,000 
2,100 


Years. 
2 
1 
2 
1 


Sixth 


$1,500 
2.200 
1,700 
2,500 


Years. 
5 


Third. . 




2 


Fourth .. 


Fighth 


1 


Filth. . 




2 









No additional investment is required for the tenth year's operation. 

Each investment for railroad construction must be depreciated during the period of 
its actual use. The first year's outlay will thus be depreciated at the rate of one-tenth 
annually throughout the entire operation; the second at one-half annually during the 
second and third years; the third wholly during the year following the investment; 
and so on. The detailed calculation follows: 

Investment and depreciation — Roadbed. 



Years. 


Proflt- 
bearing 
invest- 
ment. 


Depre- 
ciation 
during 
year. 


Addi- 
tional 
invest- 
ment- 
end of 
year. 


Years. 


Profit- 
bearing 
invest- 
ment. 


Depre- 
ciation 
during 
year. 


Addi- 
tional 
invest- 
ment — 
end of 
year. 


1 


$4,500 
5,850 
5,000 
4,750 
5.600 
3, 750 
5,200 


$450 
1,350 
2.450 
1.250 
3,350 
750 
1,850 


$1,800 
1,100 
1,000 
2. 100 
1,500 
2.200 
1,700 


8 . 


$5,050 
4.000 
2,000 


$3,550 
2.000 
2,000 


$2,500 


B 


9 


8 


10 . 






Total 




6 


40,300 
4,630 


19.000 
1,900 




6 


Average annual.. 




7 









Thus, while $19,000 ia invested all told in the various railroad grades and must be 
depreciated on the timber handled, the average profit-bearing capital tied up in 
such improvements is but $4,630. The entire original outlay is returned in the accu - 
mulated depreciation charges. 

Calculation by Investment Items. 

A simpler and quicker method is to calculate for each improvement or purchase of 
equipment the yearly depreciation and the average profit-bearing investment, both 
prorated over the entire operation. Yearly depreciation is determined by dividin 
the total shrinkage in the value of the improvement or equipment by the number of 
years in the operation. The average profit-bearing investment is determined by the 
following formula: 

One-half of the sum of the initial investment and its residual or wrecking value 
multiplied by a fraction whose numerator is the number of years during which the 
particular improvement or equipment is in use and whose denominator is the total 
number of years in the operation, plus one-half of the yearly depreciation. 

Wherever depreciation takes place in a "straight line" — that is, at a uniform rate 
annually during the period of use — this method yields the same results as the preceding 
calculation. If depreciation does not progress at a uniform rate throughout the period 
of use, it yields a lower average investment. A uniform rate of depreciation can be 
fairly assumed, however, in most investments, and is the more common undustrial 
practice. 



22 



APPRAISING STTJMPAGE ON NATIONAL FORESTS. 



The addition of one-half of the annual depreciation in obtaining the average profit- 
bearing capital under each item of investment is based on the assumption that depre* 
ciation is charged off at the end of each year rather than currently during the year. 
This is equivalent to calculating the average investments as at the beginning of each 
of the respective years in the operation rather than at the middle of the year. To 
illustrate: 

A $10,000 investment is to be wholly depreciated in 10 years, at $1,000 annually. 
The successive investments at the beginning and middle of each year are: 



First year.., 
Secontl year 
Third year. 
Tenth year. 

Total. 
Average 



Beginning. 



Sin.onn 

9.000 
8.000 
1.000 



ss.ono 

5,500 



Middle. 



$9,500 

8.500 

7,500 

500 



50.000 
5,000 



An average for the beginning of each year is obtained under the formula by taking 
one-half the sum of the initial investment and residual value (.$10,000+0), together with 
one-half of the annual depreciation, $1,000. The addition of one-half of the annual 
depreciation thus results in a figure representing the investment during a 12-month 
interval in the exact center of the operating period, or the true mathematical average. 

This treatment of depreciation is not strictly applicable to all operations. It is, 
however, the more conservative basis of determining average investments and will 
therefore be followed uniformly in Service appraisals. 

The calculation of average depreciation and profit-bearing capital by each invest- 
ment item will be of more general service because of its shorter and simpler form than 
the other method of calculation, by separate years. 

The example given on page 19 recast in this form is as fellows: 

Investment and depreciation — Logging equipment. 



Years or use. 


Initial 
invest- 
ment. 


Yearly 
deprecia- 
tion. 


Wrecking 
value. 


Average 
profit- 
bearing 
invest- 
ment. 


10 


$10. 500 
1.200 
1.800 


$1, 050 
108 
90 




$5, 775 


9 


$120 
900 


648 


6 


720 






Total 


13, 500 


1,248 


1,020 


7,143 







The same results are obtained as under the former method. 

The annual depreciation of the first item is one-tenth of the initial investment; of 
the second, one-tenth of a total shrinkage of $1,080; of the third, one-tenth of a total 
shrinkage of $900. 

The average interest-bearing investment under the first item is — 



under the second- 



under the third — 



10 10,500 1,050 . 
10 X 2 + 2 ' 



9 v , 1,200+120 , 108. 
X o H — S~> 



10 



5 1,800+900 , 90 



10 



X 



+ 



2- 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



23 



The calculation of investments in roadbed, ties, and laying steel, on page 21, recast 
in this form is as follows: 



Years of use. 


Initial 
invest- 
ment. 


Yearly 
deprecia- 
tion. 


Average 
profit- 
bearing in- 
vestment. 


Years of use. 


Initial 
invest- 
ment. 


Ye3ily 
deprecia- 
tion. 


Average 
profit- 
bearing in- 
vestment. 


10 


$4,500 
1,800 
1,100 
1,600 
2,100 
1,500 


$450 
180 
110 
160 
210 
150 


$2, 475 
270 
110 
240 
210 
450 


2 


S2.200 
1,700 
2,500 


$220 
170 
250 


$330 




1 


170 


1 


2 


375 




Total 




1 


19,000 


1,900 


4,630 


5 









The results are the same as those obtained in the first calculation. The average 
interest-bearing investment is computed for each item, as 10/10, 2/10, 1/10, etc., of 
one-half of the initial outlay, this being a 10-year operation, plus one-half of the yearly 
depreciation. 

The following illustration shows the application of this method to a complicated 
railroad investment, parts of which are made and withdrawn at irregular intervals: 

A main railroad must be built at the outset of a 20-year operation, at a cost of $72,000. 
Two years will be required for its construction before cutting begins, approximately 
one-fourth of the amount being expended during the first year and three-fourths dur- 
ing the second year. Interest on these amounts at fi per cent ($18,000 for two years and 
$54,000 for one year) will be included as part of the initial investment, which thus 
aggregates $77,400. It will be fully depreciated in the 20 years' operation. 

The main railroad suffices for logging during the first two years. Three miles of 
spurs are then required, to be used four years and abandoned. The estimated cost 
is $2,000 per mile for roadbed, ties, and labor and $2,400 per mile for steel. Five miles 
of additional spurs will then be necessary. This will necessitate the purchase of eteel 
for 2 miles, at $2,400, and an outlay for roadbed, ties, and labor for 5 miles, estimated 
at $1,800 per mile. These spurs are to be used four years, by which time the timber 
tributary to them will be cut out. 

Six miles of spurs into other units must then be graded and laid. The roadbed and 
labor in track laying are estimated at $1,500 per mile. One additional mile of steel 
must be purchased at a cost of $2,400. This section of track will supply logs for five 
years. Extensions aggregating 3 miles must then be provided for the last five years' 
logging, the 6 miles previously constructed remaining in use. The extensions are 
estimated to cost $2,000 per mile for roadbed, labor, etc., and $2,400 for steel. 

The investments in roadbed will be without value at the end of the operation and 
must therefore be wholly depreciated. All investments in steel rails will be depre- 
ciated at 5 per cent annually, leaving a wrecking value, for second-hand rails, in the 
case of steel used during but a portion of the operation. 

These investments may be tabulated as follows: 



Years of use. 


Initial in- 
vestment. 


Yearly de- 
preciation. 


Wrecking 
value. 


Average 
profit-bear- 
ing invest- 
ment. 


20 


$77,400 
l 6, 000 
' 7, 200 
' 9,000 
"4,800 

1 9,000 
»2,400 
i 6, 000 

2 7. 200 


$3,870 
300 
324 
450 
168 
450 

60 
300 

90 




$40, 635 


4. . 




750 


18 


$720 


3,726 


4 


1,125 


14 


1,440 


2.268 


10 .. 


2,475 
930 


10 


1,200 


5 


900 


5 


5,400 


1,620 




il 




Tot 


U'J.000 


6,012 


8,760 


54,421 




> Roadbed, etc. 




! Steel. 







24 APPBAISING STUMPAGE 0.N NATIONAL FOBESTS. 

Of the investments made at the beginning of the third year, for example, the 
roadbed ia in use four years and the steel 18 years. The average yearly investment 

for this piece of roadbed is therefore computed as ™X— 5— H — s~; f° r the steel as 

IS 7200+720 324 

2j;X s 1 — <T' ^ * 8 seen tnat wn ile $129,000 is invested in the operation at 

different times, the average capital at work in the business and entitled to profit is 
$54,429. The entire $129,000 is returned, however, by a depreciation charge of $0,012 
annually for 20 years and the wrecking value of $8,760 at the end of the operation. 

It will be noted that the dates when particular investments are made and with- 
drawn are of no consequence. The telling factor is the number of years during which 
each investment is at work. 

OPERATING COSTS. 

Standard ClassiGcation. 

The following classification of operating costs will be used as standard by the Forest 
Service. Not all of its items are applicable in every appraisal and further subdivision 
may be necessary in some instances. The main classification should, however, be 
uniformly used. 

Classification of operating costa. 
1. Logging. 

(1) Stump to landing. 
a. Felling. 
6. Bucking. 

c. Swamping. 

d. Trimming, peeling, and sniping (included in swamping or yarding as 

case may be). 

e. Skidding or yarding. 

/. Hauling, chuting, roading, etc. 
g. Decking or piling at yards. 
h. Maintenance — supplies and repairs. 
i. Supervision. 1 
(.2) Landing to mill. 

a. Loading, breaking out landings, or other work at landing itself. 
6. Scaling. 

c. Railroading, hauling, driving, fluming, or other transportation charges. 

d. Unloading at mill pond or yard. 

e. Maintenance — supplies and repairs. 

f. Supervision. 1 

(3) Extra costs of logging under Forest Service regulations. 
a. Cutting of timber under protection requirements. 

(a) Net cost of cutting diseased trees (deducting yield in merchant- 
able logs) prorated over entire cut. 
(6) Net cost of cutting snags (deducting yield in merchantable logs) 
prorated over entire cut. 
6. Slash disposal. 

(a) Brush piling. 

(6) Burning piled or loose slash. 

(c) Clearing firebreaks. 

(tf) Burning slash as cut. 

1 Use one supervision item for logging and woods work if preferred. 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 25 

2. Manufacture, mill pond to f. o. b. cars. 

(1) Sawmill. 

a. Pond, handling logs in pond and putting on jack chain (labor). 
6. Sawing, from log on jack chain until lumber leaves trimmers (labor). 

c. Sorting, carrying lumber to transfer chains, buggies or rolls, including 

grading and tallying (labor). 

d. Power (labor). 

e. Maintenance. 

Supplies. 

Repairs (labor and materials). 
/. Millwright (labor). 
g. Filing (labor). 
h. Oiling (labor). 

(2) Yard. 

a. Transportation to yard, taking lumber from transfer chains, buggies, or 
rolls, or on delivery from kiln or planer, to piles. 

6. Handling, piling, etc., exclusive of loading (labor). 

c. Maintenance. 
Supplies. 
Repairs (labor and materials). 

(3) Kiln. 

a. Transportation to kiln. 
6. Handling (labor). 

c. Power (labor). 

d. Maintenance. 

Supplies. 

Repairs (labor and materials). 

(4) Planing mill. 

a. Transportation to planing mill. 
6. Handling (labor). 

c. Power (labor). 

d. Maintenance. 

Supplies. 

Repairs (labor and materials). 

(5) Sheds. 1 

a. Transportation to sheds. 
6. Handling (labor). 

(6) Loading. 

a. Transportation to cars, including taking down yard piles, repiling in 

cars, etc. 
6. Handling (labor). 

3. Sales. 

(1) Traveling salesmen. 

(2) Commissions. 

(3) Advertisements. 

(4) Retail yards. 2 

4. Taxes and insurance. 

(1) Taxes. 

a. On permanent improvements, including franchise taxes. 

b. On movable equipment. 

c. On logs. 

d. On lumber (yard stock). 

1 Include under ''Yard" if desirable. 

1 The operation should be carried through to retail yards only when the organization of a specific plant 
makes this necessary to a proper analysis of costs and returns. As far as practicable, returns will be based 
upon wholesale prices f. o. b. cars at nearest common carrier shipping point. (See p. 34.) 



26 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

4. Taxes and insurance — Continued. 

(2) Insurance. 

a. On logs. 
6. On lumber. 

c. On permanent improvements. 

d. On equipment. 

e. Liability insurance for injuries to workmen. 

5. General expense. 

(1) Cruising and layout of operation, surveys, etc. 

(2) Protection of sale area from fire. 

(3) Office expenses. 

a. Timekeeping. 

b. Clerical help. 

c. Stationery, postage, telegrams, etc. 

d. Rentals, lighting, water rents, telephone service, etc. 

e. Association dues, etc. 

(4) Fees and other expenses in employing labor. 

(5) Supervision: Salaries and expenses of administrative force, including fore- 

men whose time is not wholly chargeable to specific operations. 

Necessity for Ascertaining all Operating Costs. 

The chief purpose of this detailed enumeration is to cause appraisers to study all 
features of an operation thoroughly and take all necessary co?ts into account. Caution 
under this head applies particularly to supervisory costs, selling expenses, the cost of 
employing and insuring labor and like items which do not appear on the face of current 
work. Study of running operations is the only safe guide to many of these items. 
Their inclusion in the calculation in accordance with prevailing industrial conditions 
and practice is essential to an accurate appraisal. 

Use of Conservative Figures. 

Costs should be fairly and liberally reckoned. Men watching going operations are 
inclined to figure too closely, taking standards which are not practicable in a season's 
run and overlooking the delays and losses of close connection which occur between 
constituent portions of the work. The costs used should be practicable under con- 
tinuous operation for a long period. They should check with going figures at which 
operations for a season or more are being conducted by reasonably efficient concerns. 
The aim will be to strike a fair average under which the inefficient operator must 
stand the losses due to his inefficiency, while the exceptionally able lumberman will 
make a higher profit on account of his special skill or ability. 

Checks from Jobbing Rates and Going Operations. 

A detailed classification of operating costs should be presented in the appraiser's 
report. Checks by sections of the work, such as the cost of loading, hauling, and 
landing logs on a given haul, or the total cost of logging or milling, should be obtained 
from going operations in similar timber wherever possible. Current jobbing rates, if 
available, also serve aa useful checks. Any such rates or average costs must, of course, 
be authentic. 

Milling costs tend to be much more uniform over a considerable region and much 
more susceptible of standardization than logging costs. In many manufacturing dis- 
tricts, with well-defined types of mills, average figures may be had for the total cost of 
manufacture and sale, including mill depreciation and maintenance. These are the 
more trustworthy when embodying the experience of a number of operators, and if 
well established may be substituted for estimates of the same items in stumpage 
appraisals. Superintendence, selling costs, and other general expense items also 
tend to be the same in plants of the same general size and type and can often be 
standardized to advantage for considerable regions. 



APPRAISING STUMPAGE ON NATIONAL FOEESTS. 27 

Extra Costs of Service Requirements. 

It is important to give full weight to the added costs of operation due to requirements 
Imposed by the Forest Service. These should be estimated separately for items like 
brush disposal, which are readily segregated from other operating costs. The extra 
cost of other requirements, such as reserving a portion of the timber, should be included 
in the cost of the particular step in the operation to which the requirement applies. 
In other words, the cost of each process should be estimated as the Service will require 
the work to be done. The appraiser's report may well contain, however, a summary 
of the effect of all Service requirements upon operating costs and investments for the 
information of prospective purchasers. 

Expenditures under such requirements which are made currently in connection 
with other woods operations call for a sum of working capital analogous to that for 
logging costs and having the same turnover (See p. 29.) Other expenditures, par- 
ticularly brush burning, may be incurred after the logs are removed, or indeed after 
the' lumber has been manufactured and sold. Such expenditures are paid out of 
returns for the product and require little or no additional working capital. 

Basis of Computation. 

Logging and transportation costs to the mill will be computed on log scale; milling 
costs on lumber tally. This accords with trade practice and facilitates allowance for 
overrun. 
Distinction Between Operating Costs and Fixed Investments. 

Expenditures for temporary improvements, such as chutes or roads in use for a year 
or less, may be charged either as fixed investments or operating costs. The difference 
in the resulting appraisal is unimportant. If classed as investments they increase the 
charges for depreciation and profit on fixed investments. If classed as operating costs, 
they increase this item, together with working capital and the profit earned by it. 

To illustrate — $1,000 is to be expended during a logging season for temporary truck 
roads in an operation cutting 5,000.000 feet annually. As an investment, this outlay 
adds 20 cents per thousand feet to the depreciation and 4 cents per thousand feet to the 
profit, figurinsi the latter at 20 per cent on the invested capital. As an operating cost, 
it adds 20 cents per thousand feet to the current charges and 4 cents to the profit on 
working capital, assuming but_one turn annually for the expenditure and the same 
profit rate. 

Period of Use the Deciding Factor. • 

The period of use of the structure or material should be the deciding factor. In 
Forest Service practice all expenditures for improvements or equipment used for 
one year or less and having no residual or wrecking value will be classed as operating 
costs. Improvements and equipment used for longer periods or which will have a 
residual or wrecking value at the end of the operation will be classed as fixed invest- 
ments. 

Maintenance. 

Maintenance is often confused with depreciation, but should be kept distinct. It 
is a current charge for blacksmith and machine shops, section crews on railroads, 
millwrights, repair kits, supplies, etc., expended solely for the upkeep and repair of 
existing structures or equipment. It varies greatly with different improvements or 
kinds of equipment, depending upon their nature and the amount and severity of use, 

A locomotive, for example, has a first cost of $9,000, a life of 12 years, and an esti- 
mated scrap value at the end of that time of $000. The depreciation charge necessary 
to restore the original investment is thus $S,400, or $700 a year; $200 additional may 
be required annually, however, for machine-shop work, replacement of minor parts, 
etc. The latter is maintenance. 



28 APPKAISING STTJMPAGE ON NATIONAL FOEESTS. 

Maintenance of Mills. 

Maintenance is always an important and unavoidable charge in milling, on account 
of the constant repairs, alteration of machinery, etc., necessary in keeping up an 
efficient mill. The depieciation of a mill, however, where large supplies of timber 
insure long life, may be very small. Generally speaking, as the depreciation of mills 
and other machinery is reduced — that is, as a longer operating life is assured — expendi- 
tures for maintenance must be increased because of the greater average amount of 
repairs and replacements required. Average maintenance costs for different kinds 
of improvements and equipment can best be obtained from local experience in similar 
operations. 

Selling Costs. 

Selling costs are specialized and vary with the character of the operation. In most 
small plants the mill cut is either contracted in advance or sold to local buyers, selling 
costs being largely or wholly eliminated. Large plants with extensive yard stocks 
which sell their cut in competitive territory, on the other hand, may incur very high 
Belling costs. This charge can be determined only from local trade conditions. It 
can be handled best by establishing average selling charges for the principal types of 
plants in each locality, classified by output or by other industrial factors which affect 
this item. 

Taxes and Insurance. 

Taxes and insurance are grouped apart from general expense to facilitate the deter- 
mination of working capital. Prevailing tax assessments on the forms of property 
carried in a lumber operation, as percentages of their actual or sale value, and tax 
levies on assessed valuation can usually be obtained directly from the county authori- 
ties. Insurance rates are usually standardized for the various forms of property — 
mills, lumber in yards, etc. Local practice will be the best index to the proportion 
of the value of the particular class of improvements or other property on which insur- 
ance is carried. Liability insurance, to cover injuries to workmen, should similarly 
be estimated in accordance with the common practice in this regard. 

General Expense — Superintendence. 

The principal general expense charge is superintendence. The supervision of each 
portion of the work, as logging from stump to landing, -should be included in the cost 
of that part of the operation. General expense should include only superintendence 
which applies to the entire organization and can not practicably be segregated 
between its parts. 

General expense charges are the least tangible of any in the operation and the most 
easily overlooked. Their inclusion in the calculation is as important, however, as 
the cost of felling or skidding. Careful study of the organization of existing operations, 
the cost of superintendents and other executive officers, and of necessary office ex- 
penses is essential to gauge these items accurately in stumpage appraisals. 

WORKING CAPITAL. 

Elements in Working Capital. 

Operating costs are paid either from working capital or directly from the proceeds 
of sales. 

Working capital thus depends upon two elements (1) the amount of current expendi- 
tures, and (2) the time which elapses between outlay and realization. While the 
amount of such capital actually in use varies from month to month, it will for appraisal 
purposes be regarded as a constant fund fixed in accordance with the average require- 
ments of the business. This accords with the common business practice of carrying 
short-term notes for periods when special demands must be met and a corresponding 
balance when sales are most active. Working capital is entitled to regular yearly 
profit and must be found intact at the end of the operation. It is entirely separate 
from fixed investments and has no relation to depreciation. 



APPRAISING STUMPAGK ON NATIONAL FORESTS. 29 

Variation in Different Operations. 

The amount of working capital required varies widely in accordance with the 
product of the operation, the methods of marketing it, and the local logging condi- 
tions and trade practices. Uniform methods of calculation are not practicable in 
stumpage appraisals. The following discussion is intended to suggest ways of deter- 
mining working capital rather than to establish hard and fast rules. The experience 
of operators is the best aid in estimating working capital and should be obtained 
whenever possible. 

Frequency of the Turn. 

The factors which bear most directly upon the amount of working capital needed in 
an operation are (1) the total sum of annual operating costs and stumpage payments, 
and (2) the average period between expenditures for these purposes and corresponding 
returns from sales of the product. Broadly speaking, the working capital must be 
equivalent to three-fourths, one-half, or one-third of the total expenditures each year 
for operating costs and stumpage payments if the average period between outlay and 
realization is nine months, six months, or four months, respectively. Where an annual 
log drive is required, working capital may be turned but once a year. With railroad 
logging and quick sales it may be turned as often as once a month. In exceptional 
cases manufacture and sale follow logging so quickly that labor and supply bills can be 
paid directly with a portion of the returns, and working capital is largely eliminated. 

Working Capital Required for Taxes and Insurance. 

Taxes and insurance become due at specified dates each year and in a continuous 
operation are repaid gradually from sales throughout the year. It is a fair assumption, 
therefore, that a fund of working capital equivalent to one-half the yearly taxes and 
insurance must be kept on hand. 

For Accounts Receivable. 

In ordinary lumber marketing, freight is prepaid by the seller and the account 
carried for 30 or 60 days, or the bill is discounted for cash payment. The former 
practice, which is far more common, requires cash to carry the operation until the 
proceeds of sales are actually in hand and available for use in the business. The latter 
is a universal trade method of securing immediate returns by sacrificing a small portion 
of them. The discount is thus a means of reducing working capital. 

Accounts receivable are often covered by short-term loans. Since no distinction is 
made in Service appraisals between borrowed and unborrowed capital, however, and 
all the funds actually required in the business must be provided for, such accounts 
should be included in the estimate of working capital. This item should be figured 
very conservatively either (1) by including the average period between sale and pay- 
ment in the "turn" of the operating costs and stumpage payments, or (2) by adding 
to the working capital as otherwise made up the running average of credits outstanding 
one month or more in operations of similar type and output. 

Since credit accounts are provided for in the profit-bearing investment, neither 
interest on them nor trade discounts, which often appear in cost statements, will be 
included in the operating charges. Any costs or losses incurred in such financial 
arrangements are fully compensated by the profit thus allowed. 

Determination of Working Capital. 

These principles may be illustrated by the following operation on the West Coast. 
It is estimated that sufficient working capital must be on hand to run the logging camp 
three months and the mill two months before funds are returned from sales in sufficient 
amounts to carry the business; that is, it is necessary to have a continuous supply 
of logs equal to the camp's output for one month at the landing, in transit, or at the 
mill, and an average yard stock of lumber equal to the output of the mill for two months. 
Payments for lumber will be made in time to carry the cost of the fourth month's 
logging and third month's milling. The working capital used in logging is thus turned 



30 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



four times a year and that used in milling six times, with the exception of funds 
carried to pay taxes and insurance in each instance, which are reckoned as turning 
twice annually. 

The working capital required in this operation may be summarized as follows: 



Expenditure. 



Amount 

per thousand 

feet. 



Portion 

paid from 

working 

capital. 



Number of 
times work- 
ing capital 
is turned 
annually. 



orking cap- 
ital required 
per thousand 
feet 
annually. 



Depreciation on logging investment 

Taxes and insurance 

Other logging costs 

Stumpage 

Depreciaiion on milling investment 

Taxes and insurance 

Other milling costs 

Total 



JO. 34 
.09 
4.86 
1.75 
.39 
.16 
3.87 



JO. 09 
4.86 
1.75 



JO. 045 
1.213 
.437 



.16 

3.87 



.08 
.645 



11.46 



10.73 



2.422 



The operation thus needs working capital equivalent to $2,422 per thousand feet 
on its annual cut of 16,000,000, log scale, a total of $38,752. The average turn ia 
approximately four and a half times a year, the working capital being about 22J 
per cent of the sum of annual operating costs and stumpage payments, $171,680. 

If market and industrial conditions made it possible to turn the working capital 
used in logging every two months and the milling capital every month, tax and 
insurance expenditures still being turned twice annually, the calculation for the 
foregoing operation becomes as follows: 



Expenditure. 


Amount 

per thousand 

feet. 


Portion 

paid from 

working 

capital. 


Number of 
times work- 
ing capital 
is turned 
annually. 


""orking cap- 
ital required 
per thousand 
feet 
annually. 




JO. 34 
.09 
4.S6 
1.75 
.39 
.16 
3. 87 










JO. 09 
4.86 
1.75 


2 
6 
6 


JO. 043 




.81 




.292 








.16 
3.87 


2 
12 


.08 




.322 






Total 


11.46 


10.73 




1.549 









Under these conditions a working capital of but $24,784 is required to carry the 
same annual cut. The average turn is nearly seven times a year, and about 15 per 
cent of the sum of annual operating and stumpage costs is sufficient for working 
capital. 

Margin for Contingencies. 

Computations of working capital on the average turn are usually overconservative. 
A surplus must always be on hand to meet special demands, and the funds at work 
in the business can not always be expanded or contracted for short periods. A margin 
of 10 to 25 per cent should be added to the sum deduced as above to put the business 
on a practical working basis. 

In Slow Operations. 

In driving or other operations whose successive steps consume the greater part of 
a year the floating capital required usually ranges from one-half to three-fourths of 
the total yearly operating and stumpage costs. Instead of estimating the "turn" of 
the funds employed in each part of the operation the total working capital may 
conveniently be averaged for the year by tracing outgo and income as follows: 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



31 



In a cut of 20,000,000 feet annually it is assumed that stumpage payments, at $2.20 
per thousand, average as of January 1; that logging costs, at $4 per thousand, 
average as of February 1; that driving costs, at $1 per thousand, average as of 
May 1; and that milling costs, at $3.50 per thousand, average as of July 1. Sales at 
$15 per thousand feet begin in August. The sale of 2,000,000 feet is credited to 
the 1st of September and each of the succeeding nine months. 

The working capital required to carry this business would then be: 



For— 


Balance 
between 
outgo and 
income for 
the year. 


Balance 

from 

preceding 

year. 


Working 
capital (or 
the month. 




$44,0110 
124,000 
124,000 
124,000 
Ml. inn 
144,000 
214,000 
214,000 
184,000 
154,000 
124,000 
94,000 


+$64,000 
+ 34,000 
+ 4.000 

— 26,000 

— 56.000 

— 86,000 


$108, 000 




158,000 




128,000 




98,000 




ss.nnn 




58,000 


J U | V 


214,000 






214,000 






184,000 






l.-,l,ll(HI 






124,000 






94,000 














135,167 











Or G3 per cent of the total annual producing cost of $214 ,000. Ten or 15 per cent should 
be added to this total for safety. 

The figures in the first column from January to August are the accrued costs of stump- 
age, logging, driving, and manufacture. The figures from September to December 
and in the second column from January to March, represent the accrued costs less sale 
receipts. The second column figures from April to June represent the surplus of sale 
receipts over accrued operating costs. The figures in the third column represent the 
capital required to carry current operating costs each month in the year. 

Calculation of Working Capital from Average Stocks on Hand. 

Another method of determining working capital, which is perhaps more direct and 
tangible than either of those discussed, is to foot up the average amount of advance 
stumpage payments, the value of the average stock of logs and lumber, the average 
total of bills receivable which are carried for one month or more, and a reasonable cash 
balance. The value of log and lumber stocks should be calculated from current stump- 
age and operating costs. While the supply of logs and lumber varies to a greater 
or less degree, a fair average can usually be figured as constant in the business. This 
method furnishes an excellent check on computations of working capital from the 
average turn. 

Use of Normal Rather than Speculative Stocks. 

The quantity of lumber carried in the yards after manufacture should be estimated 
from the average yard stock under normal trade conditions, eliminating excess stocks 
carried for speculative reasons. Stocks carried over periods of depression to obtain 
normal prices may, however, be included. 

Working Capital in Sales of Special Products. 

In sales of tie or mining material, telephone poles, etc., the product is usually con- 
tracted to one buyer for payment on delivery. In driving or fluming operations deliv- 
eries are ordinarily made during a short period of the year and expenditures for stump- 
age and logging month by month must be carried until the date of delivery. The 
average working capital required may be estimated by computing the "turn " of each 
month's outlay, or the time which must elapse before cash returns are received. A 



32 



APPRAISING STUMPAGK ON NATIONAL FORESTS. 



simple method of obtaining this result is to set down each month's expenditure, multi- 
ply it by the number of months intervening until time of payment, and divide by 12. 
To illustrate: 

Logging in a small tie operation begins on the 1st of August and continues, including 
skidding and decking, until the 1st of April. The ties are flumed in June, and pay- 
ment for the season's cut received in full by August 1. The working capital may be 
computed from the monthly expenditures as follows: 



Date of 
expenditure. 


Amount. 


Months 

until 

payment. 


Amount 
extended 
for number 
of months. 


Date of 

expenditure. 


Amount. 


Months 

until 

payment. 


Amount 
extended 
for number 
of months. 


Sept. 1 


82,000 
500 
500 
400 

l.IIKl 

800 


11 
10 
9 
8 
7 
6 


$22,000 
5,000 
4,500 
3,200 
7,000 
4,800 


Mar. 1... 


$1,200 

1,500 

900 


5 
4 
1 


$«,000 

6,000 

900 


Oct. 1 


Apr. 1 


Nov. 1 


Julv 1 




Total 










59, 400 


Feb. 1 















$59,400-s-12=$4,950, the average amount of working capital required. (For a 
detailed illustration of the method, see p. 65.) 

This method adapts itself to any special features in the expenditures of an operation, 
such as the purchase of supplies for an entire winter in advance, the payment of 
labor bills at the end of the logging season, etc. It is also readily applied in sales 
where payments for the product are distributed throughout the year, by estimating 
the number of months elapsing between the date of each expenditure and its return. 

Such calculations should be based upon the terms and methods of payment for 
labor, supplies, etc., in common usage. As the standard practice, however, com- 
missaries will not be considered in estimating working capital. Where board is fur- 
nished to laborers at a stated price or a general store is conducted in connection with 
a logging operation, it should be treated as a separate business enterprise not affecting 
the working funds required in the timber sale. If wages include board, the current 
cost of supplies and labor for the mess is a proper item of working capital. (See p. 13.) 

OVERRUN. 

Source of Overrun. 

The Forest Service will follow the practice of lumbermen in prorating logging costs 
on log scale and milling costs on mill tally. These two standards seldom agree. The 
product of the mill ordinarily overruns log scale from 4 to 30 per cent, depending on 
the size, taper, and soundness of the timber, the thickness of saws and other matters 
of mill equipment, the exact dimensions to which lumber is sawed, and the class of 
material manufactured. 

A Necessary Factor in Stumpage Appraisals. 

The Forest Service does not guarantee an overrun. It is, however, too large a 
factor to be ignored in accurate stumpage appraisals. In many operations overrun 
alone furnishes a fair profit. If equivalent to 20 per cent or more of the log scale, it 
may easily increase profits from 60 to 100 per cent. Nor should overrun be dismissed 
as no more than an offset to business hazards such as car shortage, fire losses, labor 
troubles, and the like. Accurate appraisals must take into account all of the actual 
costs which can be forseen and all anticipated returns, one of which is overrun. Haz- 
ards which enter into the risk of the operation but do not justify specific cost items 
should be given full weight in the margin allowed for profit. 

Determination of Overrun. 

The appraiser should ascertain from mill records or special mill-tally checks against 
log scale what overrun may be expected under Service scaling in the particular class 
of timber concerned. Any percentage used must be conservative, particularly until 



APPRAISING STUMPAGE ON NATIONAL FOEESTS. 33 

exact checks upon the Service scale in the same class of timber have been obtained. 
Overrun at the saw is not a safe criterion. It is important to allow for losses in fin- 
ishing and seasoning, which often reduce materially the gain at the saw. Reduction 
in grade during seasoning will be taken into account in determining average selling 
prices. (See below.) Losses in quantity botween sawing and shipping should be 
considered in fixing the percentage of overrun. Overrun figures once obtained can 
well be standardized for each species, by size and soundness of logs, over large regions. 
Separate standards should be established for small circular mills and well-equipped 
band mills. The standard overrun then used in each appraisal will depend upon the 
size of the chance and the type of mill adapted to handle it. Any further refinement 
based upon the equipment of mills is ordinarily unnecessary. 

Log Scale the Final Basis in Calculations. 

In their final form, all factors in the appraisal will bo reduced to log scale. De- 
preciation and logging costs will be computed directly on log scale. By use of the 
ascertained per cent of overrun, milling .costs and selling prices will be extended to 
the log-scale basis. This can be done by multiplying the milling cost and selling price 
per thousand feet of lumber by 1 plus the per cent of overrun. The final computa- 
tions of profit and stumpage price will thou be on log scale. The following example 
will illustrate the method: 

Let it be assumed that logging costs S4 per thousand feet log scale and depreciation 
$1; that milling costs $5 per thousand feet of lumber; that the average selling price 
is $15 per thousand feet of lumber; and that the overrun is 15 per cent. Then: 

Logging 1 M log scale $4. 00 

Depreciation on 1 M log scale 1. 00 

Milling 1,150 feet of lumber (1 M log scale) at $5 per M 5. 75 

Total costs 10. 75 

Price of 1,150 feet of lumber (1 M log scale) at $15 per M 17. 25 

Margin for stumpage price and profit per M log scale 6. 50 

LUMBER AND LOG SELLING PRICES. 

Appraisals Based Upon Lumber Selling Prices. 

Appraisals of saw timber on the National Forests will be based upon the selling 
prices of lumber manufactured in the same region from stumpage of similar quality. 
The determination of the lumber selling prices applicable to the chance is thus one 
of the most important duties of the appraiser. 

Average Selling Price of Various Grades. 

The problem is comparatively simple where lumber of but one grade is manufac- 
tured. In all but the smaller operations, however, lumber is graded and sold at 
grade prices which cover a wide range in value. The problem is further complicated 
by varying prices for different dimensions. The average selling price of the product 
in such cases depends not only upon the price obtained for each grade, but upon the 
proportion of the different grades in the standing timber. To ascertain this propor- 
tion, a careful examination of the timber is necessary, checked wherever possible 
by the cut of grades obtained in manufacturing similar stumpage at local mills. The 
proportion of grades taken should be at the time of sale, not at the saw, thus allowing 
for deterioration during planing, seasoning, and carrying in the yard. 

Form of Calculating the Average Price. 

Wherever possible, the estimated proportion of grades with the market price of each 
should be given in the following form. If this is not practicable, an average price for 
the species in which the various lumber grades have been taken into account may be 
reported. 

60813—14 3 



34 



APPRAISING STCJMPAGE ON NATIONAL FORESTS. 



Estimated per cent of grades with average grade prices for western yellow pine. 

2 per cent B and better select at .$44 $0. 88 

8 per cent C select at $36 2. 88 

12 per cent No. 1 shop at $26 3. 12 

20 per cent No. 2 shop at $18 3. 60 

25 per cent No. 3 shop at $13. 50 3. 37 

20 per cent No. 2 common boards at $16 3. 20 

8 per cent No. 3 common boards at $13 1. 04 

5 per cent Box at $10.. .-. 50 

100 per cent. Average 18. 59 

Average Selling Price of Mixed Stands. 

If necessary to obtain the average lumber selling price of all of the stumpage in mixed 
stands, a similar calculation may be made by species, as follows: 



Per 

cent. 



100 



Species. 



Western white pine. 

Yellow pine 

Larch 

Douglas fir 

Engelmann spruce . . 

White fir 

Western red cedar . . . 



Average for the chance. 



Average 

selling price 

of species. 



Weight In 
average price 
for the chance. 



$21. 00 
17.00 
13.00 
13.00 
15.00 
12.50 
12.00 



86.30 
.85 
1.56 
2.34 
.45 
3.125 
.84 



15. 465 



Lumber Prices Prevailing in Producing Regions. 

The effort should be to obtain average lumber prices, by grades, holding for the pro- 
ducing region, or manufacturing district in which the chance is located. Such a 
region ordinarily includes all the mills (1) manufacturing timber of similar species 
and generally similar quality, and (2) subject to the same market conditions as repre- 
sented by freight rates to main consuming points and competition with other manu- 
facturing districts. The more mills from which price data are obtained the better. 
The aim will be to obtain grade prices or prices by species which are general averages 
rather than individual rates applicable to a single mill. 

Lumber Prices During Normal Market Conditions. 

Lumber prices holding for brief periods are not reliable. If obtained during a year 
of depression or temporary inflation they are unfair either to the Government or the 
operator. As far as practicable, the prices used should represent normal conditions in 
the lumber market. This can be done most practicably by averaging the prices 
received during a period of two years, or even longer if repeated fluctuations have 
occurred. As a general rule no prices should be used which do not represent the 
average lumber market during at least one year. 

The appraiser should furthermore study the data on prices for as long a period ag 
authentic records are available and ascertain as far as he can the broad market ten- 
dencies indicated. If a straight average does not meet his judgment of a normal price 
in line with the movements of the market, he should recommend other rates which in 
his belief should be used. 

State of Manufacture and Shipment. 

Prices should be taken as a rule on lumber ready for shipment, commonly f. o. b. 
cars at the mill or nearest common carrier shipping point. In the case of plants which 
finish a portion of their product, the prices of the respective grades in the proportion 
and state of finish at which they are shipped may be used. Intensive forms of manu- 



APPRAISING STUMPAGE ON NATIONAL FOKESTS. 35 

facture, as boxes, sash and door, etc., should be disregarded and prices reckoned on the 
lumber itself, preferably in rougli form, at the most convenient point in the whole pro- 
cess. Lumber freights over common-carrier roads should be eliminated from price 
and cost estimates as far as practicable. Net returns at the mill or its nearest common- 
carrier shipping point is the standard basis for appraisals. 

Value or By-products. 

The sale value of lath, slabwood, and other by-products which are usually manu- 
factured and have an established market should be taken into account in computing 
the total return for each thousand feet, log scale. This may be done by adding the 
milling cost on such products per thousand feet log scale to the other milling charges 
and similarly their sale value to the lumber selling price computed on log scale. The 
same result will be closely approximated by adding the profit on by-products per M 
feet log scale to the average lumber selling price. 

Prices of Other Products than Lumber. 

When timber is sold as railroad ties, shingles, telephone poles, etc., the selling prices 
of these products as they pass from the hands of the purchaser will be ascertained and 
used in the calculation in the same manner as the selling price of lumber. Where 
products like cedar poles are handled by distributors, without manufacture, f. o. b. 
prices at main shipping points will be the ordinary basis taken. 
Use of Log Prices as a Check. 

The price of saw logs will not be used, 'however, as a basis for stunipage appraisals. 
For this purpose the lumber market is taken by the Service as determining the value 
of saw timber. In sales to loggers appraisals should be based on lumber selling prices 
and all costs from stump to market reckoned as in sales to purchasers who operate mills. 
Log prices, however, serve as an excellent check in such sales. They should be ascer- 
tained and considered by the appraiser in fixing the price of the stumpage. The 
report should indicate how far it will be practicable for loggers to purchase stumpage 
on a lumber market appraisal and what prices would be equitable if the log market were 
the basis taken. 

PROFIT. 

What Profit is. 

Profit is the amount which may be taken out of the business over and above depre- 
ciation charges, while still leaving its working capital intact. It is usually figured as a 
percentage, returned each year, of the total investment in the enterprise. It is most 
clearly represented, however, by a sum per thousand feet or a total sum on the year's 
cut. The cash balance at the end of a year's operation consists of three parts: (1) an 
amount set aside for depreciation, which pays back some portion of the original invest- 
ment, (2) working capital, or the portion of it available as money, and (3) profit, or the 
surplus over the other two sums. 

The preliminary work in Btumpage appraisals results in two figures: (1) the sum of 
operating costs and depreciation of fixed investments, and (2) the average selling price 
of the product. The difference between the two is made up of profit and stumpage 
price. The final problem is to divide this amount fairly between profit and stumpage. 
Profit Margin in Stumpage Appraisals. 

No profit is guaranteed by the Forest Service. It is necessary, therefore, not only 
to appraise on the basis of a fair net return to the operator, but to include an additional 
amount to protect the net profit and insure its realization. What the appraiser really 
estimates, therefore, is a profit margin made up of these two parts. 

An equitable profit, or profit margin, based upon ordinary management and average 
luck, is essential in every stumpage appraisal. Its aim will be, however, to insure a 
fair industrial return to the operator, proportioned to the risks and commercial standing 
of the business, not the speculative or unearned reward of the shrewd investor. 



36 APPKAISING STUMPAGE ON NATIONAL FORESTS. 



Elements in Profit. 

Profit in timber operations involves three general elements: (1) interest on capital 
invested, (2) reward for the personal energy and ability of the operator, and (3) allow- 
ance for risks to which the business is subject. 

Interest on Investment. 

Interest on invested capital at prevailing commercial rates is often treated as a cost 
rather than profit. It is, however, a return from the operation, and in National Forest 
appraisals will be classed with other returns as an element of profit. 

Capital industrially employed in National Forest operations is entitled to a return 
on its own account, regardless of any other elements of profit, of at least (i per cent. In 
nearly all business return on invested capital is the most clearly established and con- 
trolling basis of profit. This is particularly true of the larger and more permanent 
enterprises whose processes are standardized and whose organization is developed 
along permanent and stable lines. 

Reward for Personal Effort. 

The second element, reward for personal initative and capacity, is much more 
variable. In large operations, business ability and skillful management are in the 
main furnished by employees, paid by salaries, and accounted for in costs of production. 
The personal element does not enter largely into profit, although usually evident in the 
organization and beginning of an enterprise.and not infrequently recognized in going 
operations by stock bonuses or profit sharing. It is of special importance in lumbering 
as compared with other industries on account of the lack of standardized processes and 
the knowledge of many different commercial and technical branches which is required. 

In the smaller enterprises, of a more temporary character and less stable organization, 
individual energy and initiative are much more important factors in the conduct of 
the business. The capital invested is often relatively small and profit maj be largely a 
reward for personal effort. 

The weight to be given this element in Forest Service appraisals will necessarily 
vary in accordance with the character of the chance. It will be greater in small, 
Bhort-lived operations than in large sales of long duration. It should be slight in 
appraisals of timber available to well-established, going plants. On the other hand, 
it must be relatively great in the case of new enterprises with an organization to create 
and markets to develop, particularly if special conditions must be met w hich require 
exceptional experience, business capacity, or other personal qualifications on the part 
of the buyer. 

Business Risks. 

The third element of profit, a return covering business risks, is required in lumbering 
to a greater degree than in most other industries. This risk consists (1) in the double 
chance of a decline in the lumber market and an increase in operating costs, which the 
course of lumbering history shows to be great, and (2) in possible losses and accidents 
which are inherent in a business dealing with rugged physical conditions, but. can not 
be accurately foreseen or reckoned in cost estimates. While the physical risk to invest- 
ments beyond the limits of insurance are not ordinarily great, serious business losses 
are usually involved in their destruction or injury. The destruction of a sawmill by 
fire, for example, involves not only the loss of the value of the plant not covered by 
insurance, but also loss of custom, loss of operative force, and loss of profit through 
reduction in output. 

Particular chances are often subject to special risks. These directly affect their 
value and must be taken into account in appraisals by giving proper weight to the risk 
element in profit. A stream may be of such a nature as to endanger either hanging up 
drives indefinitely or carrying them through storage booms. Small streams which 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 37 

have never been driven are usually uncertain and risky features of a chance. Similarly 
the necessary location of a road, flume, or railway may subject the operation to special 
risk on account of frequent washouts. 

Risk on Fixed Investments and Working Capital. 

Risk is ordinarily much less on working capital than on fixed investments. The 
latter are not merely liable to physical damage, but become a total or partial loss if 
the enterprise fails. In a peculiar way, therefore, they are involved in the hazards of 
the business. Working capital, which is represented at any given time by logs, lum- 
ber, bank account and bills receivable, is subject to loss or reduction, but is not so 
involved in the success of the enterprise. In case of failure, lumber and log stocks 
can usually be realized on and outstanding accounts collected. Hence a smaller rate 
of profit is sometimes figured in business practice upon working capital than upon fixed 
investments. The relative amount of the two may legitimately influence the general 
profit rate. 

Other Factors Affecting Risk. 

In the consideration of timber chances, operators must also take into account possible 
overestimates of the quality of the stumpage or the selling price of the various lumber 
grades and possible underestimates of necessary investments or operating costs. The 
size and permanency of the operation are important factors. Large investments 
carried for long periods, like railroads and modern office buildings, are satisfied with a 
lower return than smaller, less stable enterprises. Operators with established markets 
and transportation facilities will accept a lower return than where these features of the 
business must be constructed or developed. All of these are factors of risk which must. 
be weighed by the appraiser in determining the profit margin which should be allowed . 

Comparison with Other Kinds of Business. 

The lumber business involves greater risk and uncertainty than most manufacturing 
enterprises. Industries characterized by permanence and physical safety of invest- 
ments, standardized processes and assured markets are run on a margin of profit which 
would be wholly inadequate for lumbering. Its general conditions are entirely 
different. Each operation must be adapted to the topography of its chance. New 
methods must often be developed and applied to peculiar local conditions. Exact- 
ness in estimates of investments and operating costs is practically impossible. 

The capital invested in fixed improvements is subject by their nature and location 
to a great fire risk which can not be as fully insured against as in most comparable lines 
of business. The work is hazardous and injuries to workmen are frequent. The 
hazard from unusual climatic conditions is greater than in most manufacturing indus- 
tries. Losses due to uncontrollable causes, such as car shortage and bad accounts, are 
common. As in other enterprises, the business is subject to labor troubles and break- 
downs. It is dependent upon unskilled labor to an exceptional degree. All of these 
tend to make a high profit margin necessary. 

Comparison with Private Operations. 

Operations on National Forests have certain financial advantages when compared 
with private lumbering. The system of small payments amounts in long-time sales to a 
substantial saving of interest and taxes. The effect of this, however, is upon cost of 
production, not upon certainty of profit. 

Operators in National Forests, however, have some advantages over private lumber- 
men in the matter of risk. Owning no timber, they have a smaller total investment, 
and consequently less to lose if the enterprise is a failure. Since title to the timber 
does not pass until it is cut and scaled, they run much less risk of loss from fire. 



38 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

On the other hand, contracting to log under Government supervision necessarily 
involves a risk, however small, which the operator on private land avoids. Further- 
more, the purchaser of National Forest timber foregoes to a large extent speculative 
profits from increased stumpage and lumber values and from overrun, both in estimate 
and scale. 

METHODS OF RECKONING PROFIT. 

Investment Method. 

A percentage return on the capital invested, covering all of the elements discussed 
above, is the clearest and most satisfactory means of reckoning the profit margin. It 
accords with the usual business practice and conceptions and permits ready compari- 
son with other industries. This method of reckoning profit, known as the "investment 
method," will be standard in the Forest Service. It should be employed uniformly 
in appraising the larger chances, and in appraising the smaller bodies of timber wher- 
ever it is applicable. 

Compensation for Personal Services. 

The investment method is seldom adapted to the smaller and shorter-lived opera- 
tions. The capital required in such cases, as a rule, is relatively little and inadequate 
as a basis for reckoning profit. Supervisory charges are usually not covered in oper- 
ating costs. The energy and ability of the purchaser are the main factors upon which 
the enterprise is conducted. Similar conditions often apply to operations cutting 
special products like railroad ties or mining timbers, which require comparatively 
little capital. 

The profit margin may be reckoned in such cases partly as a return on money in- 
vested and partly as pay for the operator's time and enterprise. 

Profit is thus split up into the elements discussed above and a return provided for 
each in its own terms. A fair percentage, taking as a rule the same rate used in the 
investment method, should be allowed on such capital as may be required for improve- 
ments or working funds. This covers interest and risk on money invested. At the 
same time, the element of personal services is covered by a salary per year or month 
adequate for the management and direction of the business. The latter is in effect 
a charge for supervision, but is fixed directly in accordance with the demands of the 
business upon the personal time of the operator. This method will be used ordinarily 
where the investment method is inapplicable. 

Overturn Method. 

Another method of reckoning profit is to take a percentage of the total operating 
cost and depreciation, or "overturn." This should be used only in cases where the 
investment is very small in comparison with current operating costs or is difficult to 
estimate, and hence affords an insufficient basis for determining profit. The method 
is uBed largely in railroad work and general contracting. If the sum of depreciation 
and operating costs, for example, is $12 per thousand feet, the profit may be figured 
as 20 per cent cf that amount, or $2.40. 

The overturn method is of special value in small sales where the investment is 
negligible or where operating costs can be closely estimated but the capital required 
is uncertain or difficult to determine. Operating costs, which make up most of the 
overturn, are usually ascertained m^re readily than investments. The overturn 
method is thus safer for appraisers who are not expert in calculating the investment 
features of lumbering operations. It may also be used if desired in arriving at the 
profit due on logging as distinct from, manufacturing where it is necessary to deal 
separately with the two parts of the operation. (See p. 43.) 



APPRAISING STUMPAGE ON NATIONAL FOKESTS. 39 

Checks on Profit Calculations. 

The rates of profit given in these instructions are necessarily tentative. Final rates 
can be established only by experience in studying and analyzing actual returns from 
many different operations. It is therefore essential to check calculations of profil by 
direct operating standards as far as they can be obtained. 

By Going Operations. ■ 

Sj lematic study of the profit obtained in going sales and private operations is a 
valuable and necessary check upon this feature of stumpage appraisals. To permit 
direct comparison, it should be computed in terms of per cent on investment, per 
cent on overturn, etc., conforming with the methods prescribed in these instructions. 
A frequent check of the results of former appraisals to ascertain what rates of profit 
are sufficient and equitable under the particular local conditions is one of the most 
essential parts of the appraiser's work. 

By Current Bids. 

The profit margin indicated by current or past bids for National Forest chances in 
the same region, as showing the basis upon which operators are willing to buy stump- 
age, should be used to check appraisals under either the investment or overturn 
method. As the lumbering industry develops in new regions and becomes more 
stable, operators are willing to purchase at lower profits. This is shown by the course 
of stumpage values in the older manufacturing regions. The prices bid in current 
sales thus form the best index to the rate of profit required by the local lumbering 
industry. 

By Money Profit Per Thousand Feet. 

The profit reckoned in the appraisal may be checked also as a sum in dollars and 
cents per thousand board feet or other unit of output. A stated profit per thousand 
feet is a direct and tangible figure, widely employed in the lumber business. As 
experience is gained, it is probable that more definite standards of profit in money 
per thousand feet can be established for operations of varying size and kind of output 
under each of the more common sets of local conditions with respect to markets, 
logging risks, etc. Such standards will greatly facilitate uniform appraisals. A 
check of the results obtained by any method of reckoning profit, from this standpoint, 
is therefore desirable. 

A profit margin of from $1 .50 to $4 per thousand feet appears to cover what is legitimate 
and necessary in practically all classes of sales which involve both logging and manu- 
facture. The smaller amount may be sufficient for established operations of consid- 
erable size where logging and market conditions are well known, methods fully devel- 
oped, and no extraordinary investment or risk is involved. The larger sum may be 
necessary in small and irregular operations and those involving exceptional invest- 
ments, special difficulties in marketing the product, or unusual risks. Under 
average conditions of investment and risk a profit margin of $2 to $3 per thousand 
feet is adequate. As the lumbering industry becomes developed and settled in any 
region a number of factors, such as lower interest rates on borrowed money, .better 
understood logging conditions, standardized methods of manufacture, and more stable 
markets, tend to reduce the profit expected. 

Check on Profits in Small Sales. 

The main factors to be taken into account in checking the profit per unit f cut are 
relative investment, relative risk, and amount of output. The following table will 
Berve as a guide in checking the profit margin obtained in small sales under different 
sets of conditions. 1 Higher profits are set down for the smaller operations because 

' This table is based upon profits obtained in current sales which are apparently satisfactory, not upon 
mathematical calculations. 



40 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



(1) their organization and methods are not so well standardized, and (2) the risk, 
return on money invested, and payment for the personal services of the operator must 
be borne by a smaller output. 



Investment. 



Risk. 



Small. 



Average. 



Large. 



Operations of 10 M daily or less 

Small (under 310,000) 

Average (310,000 to S15.000) 

Large (315,000 to 320,000) 

Operations of 10 to SO M daily. 

Small (under 820,000) 

Average (820,000 to 3)0,000) 

Large (S30.000 to 340,000) 



32. 30 
2. 8.5 
3.00 



2.00 
2.2.i 
2.50 



S2.65 
3.00 
3.30 



2.25 
2.50 
2.75 



$3.00 
3.30 
3.65 



2.50 
2.75 
3.00 



Application of the Investment Method. 

Profit calculated as a percentage of the money in the business should strictly be 
proportioned each year to the capital invested in the operation during that period. 
For simplicity, however, the average investment during the life of the sale may be 
taken. This is not mathematically exact as to the actual amount invested during any 
given year, but is a fair basis for calculating profit during the operation as a whole. 

Frequency of Turn Not Considered. 

As indicated on page 29, the frequency of the turn has an important bearing upon 
the amount of working capital required in the business. The average annual invest- 
ment once determined, however, the frequency of the turn does not affect the calcu- 
lation of profit. The average investment is conceived as a certain sum set aside in 
the operation and earning annually a specified percentage of itself, whether the over- 
turn is once a month or once a year. 

Calculation Under Investment Method. 

The application of the investment method is simple. The average amount of money 
employed in the operation, including working capital and fixed investments, must 
be determined. Fixed investments may be averaged as indicated on pages 19 to 24. 
Working capital can usually be computed as a constant amount throughout the oper- 
ation. A specified percentage of this figure gives an annual sum which must be set 
aside as the profit margin. This sum divided by the yearly cut gives the profit per 
thousand board feet. The sum of profit and depreciation per thousand feet and cur- 
rent logging and milling costs deducted from the selling price gives the stumpage rate 
at which the timber should be appraised. Expressed as a formula, the calculation 
becomes: 

X=S-(Lc+Mc+D+V eI cent of {A+W ^ 

cut 

X represents the stumpage price, S the average selling price, Lc the logging coats, 
Mc the manufacturing costs, D the depreciation of fixed investments, A the average 
fixed investment in the operation, and W the working capital, all as amounts per 
thousand feet log scale. To illustrate: 

. In an operation cutting 10,009,000 feet annually the estimated average investment 
including working capital is $235,000 and the annual depreciation $12,000. Logging 
costs $6 per thousand feet log scale and milling $4.50 per thousand feet, lumber 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 41 

tally. The overrun for the class of logs involved, yellow pine running 10 logs per 
thousand feet, is 20 per cent; and the average selling price mill run, lumber tally, is 
$10'. The operation involves comparatively low risks, the timber being cut by an 
established mill with well-developed markets. A return of 15 per cent on the invest- 
ment is deemed equitable. The elements in the formula are thus: 

Selling price (1,200 feet at $16 per M) $19- 20 

Logging costs $6. 00 

Milling costs (1,200 feet at $4.50) 5. 40 

Depreciation ($12,000-=-10,000 M) 1-20 

Profit (15 per cent of $235,000-^10,000 M) 3. 52 

Total charges 16 - 12 

Stumpage price 3. 08 

Rates of Profit Under Investment Method. 

For a lumbering operation of good size, extending over a period commensurate with 
the life of the plant, 15 to 20 per cent on money invested is a fair margin for profit. 
On chances tributary to established plants which are in a position to purchase them, 
in regions where logging involves no extraordinary problems or unusual risks and 
where manufacturing conditions and markets are well developed, 15 per cent should 
be the general standard. If new plants must be constructed and business enterprises 
developed, other conditions being substantially as above, the profit margin may prop- 
erly be extended to IS or 20 per cent. If exceptionally large investments must be 
made to open up new country, or the industry developed largely under new condi- 
tions, or if special risks like uncertain streams or extremely variable markets must be 
encountered, a profit margin of 22 to 25 per cent is equitable. Twenty-five per cent 
is the general standard in small sales where a return on the investment is combined 
with payment for personal services. 

Different Rates on Different Parts of the Investment. 

As indicated on page 37, the risk to which different parts of the investment in a 
lumbering operation are subject may vary within considerable limits. Practically 
no risk, for instance, attaches to investments in land for mill sites. Working capital 
is normally subject to less risk than fixed investments. 

Investments in main line railroads which will be maintained as common carriers 
after the chance is logged out differ from other fixed investments both in risk and 
permanence. 

A lower rate of profit, usually 10 or 12 per cent, should be allowed on railroads for 
which permanent traffic is anticipated. Otherwise no distinction will be made in the 
returns figured on the various parts of the total investment required. The differences 
in risk of mill-site investments, working capital, woods improvements, etc., and the 
proportion of each in the total should be considered, however, in choosing an average 
profit rate for the whole. 

Interest on Borrowed Capital. 

It should be noted that these prdfit margins include whatever interest is payable 
on borrowed capital. No distinction will be drawn between bonds, notes, or other 
loans and capital stock or other funds advanced directly by the operator. Out of the 
profits earned, however, must be taken whatever is required to carry the indebtedness 
of the concern. Most operators after paying their annual interest charges from the 
proceeds of the business enter the remainder as profit earned by their own capital. In 
Service appraisals which treat borrowed and unborrowed funds alike the profit margin 



42 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

includes any such carrying charges on part of the capital as well as the net returns, 
averaged for all the money used in the business. Exceptionally high interest rates 
on bonds or notes is thus a factor which should be considered in fixing the profit margin. 

Application of Return for Personal Services. 

If the capital invested is inadequate as a basis for determining profit, it may be sup- 
plemented by a return for personal services. This method is especially applicable in 
small sales, which require but limited investments and depend primarily upon the 
personal energy and effort of the operator. Such capital as is required should return 
a percentage equivalent to that customarily figured for large sales in the same locality. 
Twenty-five per cent is a fair average figure. In addition, the appraisal should 
include, as a charge for superintendence, a salary of $100 to $200 per month, depend- 
ing upon the size of the operation, as compensation for the foremanship or personal 
effort of the purchaser. 

This method will be used ordinarily when the investment method is inapplicable. 

Application of the Overturn Method. 

Profit under this method is a percentage of the overturn, or the entire production 
cost of a thousand feet of timber at the date of sale, including operating charges and 
depreciation, but not stumpage price. The calculation may be expressed by the fol- 
lowing formula: 

X=S-(Lc+ Hc+D) -per cent of (Lc+ Mc+D) 
or transposing 

X=5-(l+percent) times {Lc +Mc+D). 

Lc, Mc, and D represent logging costs, milling costs, and depreciation, all in amounts 
per thousand board feet log scale. X is the stumpage price and S the average selling 
price log scale. Per cent represents the rate of profit allowed on the overturn. 

Taking the operation used to illustrate the investment method, page 41, the following 
result is obtained from the formula: 

Depreciation is $1.20 as before, logging costs $6, milling costs $5.40, and selling price 
119.20, all in terms of log scale. If 25 per cent on the overturn be regarded as a fair 
profit, the calculation becomes: 

X=$19.20-$1.25 ($6+$5.40+$1.20) 
X=$19.20-$15.75, or $3.45. 

It should be noted that the profit margin in this calculation is $3.15, as compared 
with $3.52 under the investment method with a rate of but 15 per cent. The factors 
affecting comparative results under the two methods are discussed on page 43. 

Relation to Fixed Investments. 

It is apparent that fixed investments are included in this calculation of profit only 
to the extent of their annual depreciation. The residual portion of the fixed invest- 
ment or wrecking value at the end of the operation is given no place in the determina- 
tion of profit. As a rule, depreciation of fixed investments forms 10 per cent or less of 
the total cost of production on which profit is figured. Profit by this method is thus 
related primarily to operating costs — that is, to the overturn of working capital. 

Bearing of Frequency of the Turn on Profit. 

Under the overturn method, the profit allowed, except the small part based upon 
depreciation, is realized every time the working capital expended in operating costs 
is turned. The frequency of the turn thus has an important bearing upon the total 
profits of the year earned by the working capital in the business. In the illustration 
cited on page 42, for example, the profit margin on each thousand feet manufactured 



APPRAISING STUMPAGE ON NATIONAL FOBESTS. 43 

is $3.15. The part of this earned by working capital, excluding depreciation of fixed 
investments, is .$2.85. If the turn is but once a year, this profit would be earned by 
$11.40 of working capital, an interest rate of 25 per cent. If working capital is turned 
twice a year, the same profit would be earned by $5.70, an interest rate of 50 per cent. 
If the working capital is turned every three months, or four times annually, the 
money actually used in the business in this form would be earning 100 per cent yearly. 

Divergent returns on money invested are thus obtained under the overturn method 
unless the per cent of profit is carefully adjusted to the frequency of the turn. With 
more frequent turns, lower rates should be used. 

From the foreg dug it is clear that the overturn method is not adapted to appraisals 
made primarily from the standpoint of capital invested. The investment method 
should be used invariably under such conditions. The profit margin should be based 
on overturn only when the investment is too limited for this purpose, and it is more 
practicable to arrive at the prolit on a simple basis of contract work, disregarding 
investment considerations altogether. 

Profit may thus be based upon the overturn in small operations whose make-up is 
euch that the investment method combined with a return for personal services is not 
applicable; and in larger operations which require comparatively little capital, like 
many sales of tie, pole, or mining timber, where the overturn may be the most prac- 
ticable means of determining a fair profit margin proportioned to the character and 
risks of each chance. 

Different Rates on Logging and Milling. 

A modification of the overturn method may be used in localities where it is desirable 
to treat logging and manufacturing as distinct operations, each earning a profit adjusted 
to its peculiar conditions and risks. . In established manufacturing regions, milling is 
the more stable part of the business. Methods and costs are more uniform than in 
logging, both in the same mill from year to year and in different mills cutting the same 
class of timber. Risks are usually less variable than in woods operations. Logging, 
on the other hand, may be subject to varying combinations of topography, climate, 
accessibility, certain or uncertain log transportation, and the like. The range in 
logging costs and investments and in logging hazards may thus be much greater than 
in the case of milling. When such conditions exist, particularly in localities where 
sales are made to established mills, it may be desirable to use a uniform rate of profit 
on the overturn in milling, including depreciation of mill investments. This rate 
should be fixed in accordance with local manufacturing standards and particularly 
the frequency of the turn of working capital. Under average conditions, with working 
capital turned three or four times a year, a profit of 15 per cent on the milling overturn 
is sufficient. The profit on the overturn in logging, including depreciation of logging 
investments, may then be adjusted to the conditions and risks on each chance. 

This application of the overturn method may be illustrated by the operation pre- 
viously cited, page 41. Of the total investment required, $S5,000 is used in milling 
and $150,000 in logging. Depreciation is similarly divided, $3,000 on the mill invest- 
ment and $9,000 on the logging investment, the latter including the logging railroad 
and rolling stock. Fifteen per cent profit, the standard for the region, will be allowed 
on the milling overturn and 25 per cent on the logging overturn, the chance involving 
average hazards. 

The formula is as follows: 

X=S-(Lc+LD+peT cent [Lc+ LD}) -( Mc+ MD +per cent [Mc+MD]) 

That is, the stumpage price is the selling price less the sum of logging costs, depre- 
ciation on logging investments and logging profit, which is a per cent of logging costs 
and depreciation; less also the sum of milling costs, depreciation on mill investments, 
and the milling profit, which is a per cent of milling c osts and depreciation. 



44 APPEAISING STUMPAGE ON NATIONAL FORESTS. 

Using the data from the operation cited, 

X=$19.20-($6+$0.90+.25 [$6+.90])-($5.40+.30+.15 [$5+.30]) 
A'=$19.20-$6.90-.25 (6.90) -$6.55. 
X=J>4.03, the stumpage price. 

The profit on logging and manufacturing may also be calculated separately by 
using the overturn method for the former and the investment method for the latter. 
This use of the two methods is adapted to the usual conditions in the industry where 
logging and milling are conducted by separate business organizations. Manufac- 
turing operations represent the larger investments and their profit can be determined 
best as a return on investment. Logging jobbers, however, who supply the mills with 
timber require comparatively little capital. Personal ability and effort are as a rule 
the main factors in their business. Their profit may thus be satisfactorily determined 
(1) by the overturn method, or (2) by payment for personal services with a percentage 
return on such capital as their logging business may require. 

While a distinction is recognized in calculations of this character between logging 
and milling, the stumpage price should always be obtained from the selling price of 
lumber, not the selling price of logs. (For a further discussion of this point see 
p. 35.) 

Rates of Profit Under Overturn Method. 

The percentage of overturn used in computing profit should be gauged by the per- 
manency of the operation, the various elements of risk which attend it, and the local 
requirements and standards of the particular business. For tie or mining timber 
operations, with the cut contracted in advance and the market risk thus eliminated, 
20 per cent may be taken as standard on fairly accessible chances which involve no 
unusual logging hazards. In saw-timber sales subject to the usual market risks, 25 
per cent should be used under average conditions. If, on the other hand, inaccessible 
timber must be opened up and exceptional risks incu r red in log driving or in marketing 
the cut, a profit of 30 to 35 per cent is equitable. 

DISTRIBUTION OF PROFIT AND DEPRECIATION IN MIXED STANDS. 

Prorated on Quantity of Timber. 

In the foregoing instructions profit and depreciation have been prorated evenly 
over the entire cut. This is the simplest method and is directly applicable where 
one species is involved. The same method may be used in mixed stands. Average 
figures for profit and depreciation, together with the operating costs, may be deducted 
(1) from the selling price for each species giving directly its stumpage rate, or (2) from 
an average selling price for all species giving an average stumpage rate, which may then 
be distributed over the various species on any basis desired. 

Prorated on Net Value of Timber. 

It is preferable to prorate the total annual profit and depreciation in mixed stands 
on value rather than quantity. The final results are the same. Distribution on 
value, however, furnishes a fairer basis for fixing stumpage rates as between species. 
It also affords the most logical means of carrying out the Service policy of maintaining 
a minimum rate for green timber of each species and adjusting stumpage prices on the 
more valuable timbers so that they will carry the less valuable in the sale. At the 
same time it facilitates giving due weight in appraisals to differences in producing 
costs between species, as in reduced milling charges for inferior woods manufactured 
only into low-grade lumber or timbers. 

The most satisfactory method is to prorate the gross annual depreciation and profit 
over the difference between operating cost and selling price, for the several species in 
the proportions entering into the annual cut. To illustrate: 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



45 



A yearly cut is made up of 4,000,000 feet of sugar pine, 3,000,000 feet of yellow pine, 
and 2,000,000 feet of white fir. The margins between selling prices and costs of pro- 
duction, exclusive of depreciation and profit, are: 



Species. 



Sugar pine.. 
Yellow pine 
White fir... 



Selling 
price. 



S20 
18 
15 



Operat- 
ing cost. 



$10 
10 



Margin. 



$10 
8 
6 



The total net value, or sum of the margins, over which depreciation and profit may 
be prorated, is thus: 

Sugar pine, $10X4,000 M $40, 000 

Yellow pine, $8X3,000 M 24, 000 

White fir, $6X2,000 M 12, 000 

Total 76, 000 

The annual depreciation and profit (using investment method) which must be paid 

out of this total has been computed as $34,200. Hence " ,'" =$0.45. That is, 

every dollar of margin between operating costs and selling price must pay 45 cents 
toward profit and depreciation. The following charges per thousand feet for deprecia- 
tion and profit, by species, are thus obtained: 

Sugar pine, 10X10.45 4. 50 

Yellow pine, 8X$0.45 3. 60 

White fir, 6X$0.45 2.70 

By this method inferior species which yield no margin between operating costs and 
selling price, or a negative margin, but which must be included in the sale for silvi- 
cultural reasons, are automatically relieved of profit and depreciation, and the charge 
upon the other timbers for these items proportionately increased. 

The same result is readily obtained on a thousand-foot basis, using the per cents of 
the different species in the cut. That is, to obtain the average margin: 

45 per cent sugar pine at $10 $4. 50 

33 per cent yellow pine at $8 2. 64 

22 per cent white fir at $6 1. 32 

Total 8. 46 

Depreciation and profit per M feet 3. 80 

$3 80 

|^27=$0.45, to be taken from each dollar of margin for these items. 

This method of adjusting the prices of the more and less valuable species is believed 
to accord with customary business practice. Volume of money handled, rather than 
quantity of this or that product, is the usual basis for figuring carrying charges, depre- 
ciation, and returns. In logging, improvements are frequently constructed primarily 
to take out certain valuable species. Inferior timbers may be cut or left as the market 
warrants. In such cases operators will usually cut inferior species if a profit can be 
netted over bare operating costs, figuring that the cost of improvements is borne 
wholly by the better stuff. The foregoing is believed to be a logical and rational 
application of this principle. 



46 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

STUMPAGE PRICE. 

How Obtained in Mixed Stands. 

The value of stunrpage is taken, in Forest Service appraisals, to be the portion of the 
lumber selling price left after deducting operating costs, depreciation, and profit. In 
mixed stands it should be obtained for each species by deducting these charges from 
its own lumber price. Depreciation and profit should be prorated over the cut on a 
net value basis, as described on pages 44 and 45. 

Flat Rates not Desirable. 

Flat rates for two or more species of different lumber values are not desirable. They 
may prove inequitable if the proportion of species in the cut differs from that in the 
estimate; and they tend to make close utilization of inferior species covered by the 
average price difficult. The standard practice of the Forest Service, therefore, will be 
to appraise each species having a different lumber value separately and as far as 
possible upon its own merits. To simplify scaling and cutting reports, however, 
species whose appraised value does not differ by more than 25 cents may be thrown 
together under one contract price. 

Use of Minimum Stumpage Rates. 

The appraisal of inferior species not infrequently results in very low or negative 
stumpage prices. It has been deemed advisable to establish a minimum rate of 50 
cents per thousand feet for green timber below which no species will be sold. Inferior 
species will therefore be appraised on their own merits as determined by lumber price 
and cost of production as long as the resulting stumpage value is not less than 50 cents 
per thousand feet. If the calculation brings the price below 50 cents, the appraisal 
will be at that figure. The prices put upon the more valuable species in the stand 
must then be reduced sufficiently to carry the difference and maintain the average 
profit which is deemed equitable on the entire cut. 
Distribution of Loss on Inferior Species. 

Such adjustments in the stumpage rates of various species may be made by a simple 
arithmetical process, as follows: 

It is assumed that separate appraisals, on individual lumber price and producing 
cost, give the following stumpage rates in a mixed stand of California timber: 

Sugar pine (30 per cent of stand) $5. 00 

Yellow pine (35 per cent of stand) 4. 00 

".bite fir (20 per cent of stand) 20 

Incense cedar (15 per cent of stand) —.10 

By appraising white fir and cedar at the Service minimum of 50 cents, the amount 
to be made up on the other species, thousand feet for thousand feet, is 20 per cent of 
$0.30 + 15 per cent of $0.60, or $0.15. This amount will be spread over the sugar and 

yellow pine prices; that is, 30 per cent of $5 + 35 per cent of $4, or $2.90, *■> qq = 

approximately 5 cents, to be deducted from each dollar of stumpage value in the pines. 
The adjusted rates are therefore: 

Sugar pine $4. 75 

Yellow pine 3. 80 

White fir 50 

Incense cedar 50 

This method should ordinarily be used only when necessary, after profit and depre- 
ciation have been prorated on value (see p. 44), to maintain the minimum price. 

Trade Valuation of Inferior Species. 

The stumpage rates placed upon inferior species should be checked by trade practice 
and valuation. Consistent and practical results :;)-■ desired, conforming as far as possi 



APPRAISING STUM PAGE ON NATIONAL FORESTS. 47 

ble with the rating of such timbers by local operators. Standard prices for low-grade 
species representing the operator's valuation and not below the minimum rate may be 
used throughout a region if found to be most practicable and satisfactory. In any event 
the prices of the better timbers must be adjusted to yield the total profit called for by 
the appraisal. 

Stumpage Prices for Special Products. 

The methods of appraisal previously discussed should be used where the main 
products of an operation are other than lumber, as shingles, crossties, poles, or mine 
timbers. Average selling prices will be determimed for the product in the form in 
which the usual operator disposes of it, as manufactured shingles, hewn or slabbed 
ties, etc., and operating costs back to the stump, depreciation and profit estimated. 
Rates of profit similar to those discussed for saw-log sales should be allowed in opera- 
tions of similar size, conditions of accessibility, operating difficulties, and risks, except 
where other rates have been indicated. (See p. 44.) 

Stumpage rates for special products should be based as far as possible upon the unit 
of measure common in local trade, as the piece in case of poles and crossties, the linear 
foot for mining timbers, the stacked cord for shingle bolts or fuel, etc. 

APPRAISALS FOR SMALL SALES. 

Small Operations Irregular. 

Small operations are seldom as closely organized and well supervised as those of good 
size and permanence. Equipment is usually less efficient, capital inadequate, and 
labor frequently unskilled and transient. Costs are hence least uniform in small oper- 
ations and nearly always proportionately higher. Care must be taken in such appraisals 
not to impose impracticable standards, but to figure on the level of the conditions 
found. 
Appraisals Based upon Methods in Use. 

It is the policy of the Forest Service to base appraisals in small operations upon the 
methods of logging and manufacture actually employed, even if comparatively ineffi- 
cient. As far as practicable, small mills should be classified by output and average 
costs determined by classes, which cover existing conditions as to character of labor 
available,- amount of capital upon which the business is run, and the kind and effi- 
ciency of equipment. 

Such average costs may be used in appraisals when desirable with only such varia- 
tions as the particular conditions on each chance require. 

Prices Actually Obtained. 

The lumber prices used in such appraisals will similarly be the local prices actually 
obtained by these small operators, not the prices prevailing in the general manufac- 
turing region. 
Liberal Profit Necessary. 

The profits allowed in appraisals for small sales, as indicated on page 41, must be 
relatively high, averaging more per thousand feet than in larger operations. Thirty to 
thirty-five per cent on the overturn or 25 per cent on invested capital plus a super- 
vision charge to cover the personal services of the operator should be the general 
standard in small sales of saw timber subject to the usual market risks. In sales of 
ties, mining timber, and other material where the entire cut is contracted in advance 
a profit of 20 per cent on overturn is usually adequate. Lower profits may be used 
where current sales and bids indicate that they are satisfactory. 

Small Operations Competing in General Markets. 

For small operations whose product is sold in general markets in competition with 
large plants the average lumber prices prevailing in such markets will necessarily be 
taken as the basis of appraisals. The grade and quality of the product, which is usually 



48 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

poorer than lumber manufactured by large mills, should, however, be considered. 
Otherwise the policy indicated above as to efficiency of methods and labor and scale 
of profits will be followed. 

As indicated under ' ' Size and type of plants, ' ' page 13, investments will be estimated 
and appraisals made on the basis of small operations wherever it is practicable for them 
to handle the timber. 

If larger operations are clearly more practicable and logical, however, and the timber 
has been appraised accordingly, the resulting prices must be paid by any purchaser 
who takes the stumpage. Two standards of value obviously can not be set for the 
same material. Under such circumstances no concessions to the inefficiency of the 
small operator can be made. 

Schedules of Prices for Smalt Sales. 

District Foresters may authorize Supervisors to establish schedules of stumpage 
prices for specified parts of their Forests to be used in small sales. This should be 
done only where conditions are so generally uniform that differences in intensive 
appraisals of the various sale areas involved would be slight. Such schedules should 
be worked out under the Supervisor's direction in accordance with the methods 
described in these instructions, by the use of average selling prices, logging costs, and 
investments. 

SAFEGUARDS AND CHECKS. 

Check by Appraiser's Judgment. 

As indicated on page 11, all appraisals should be checked by the judgment and 
business sense of the appraiser. The prices actually recommended should be plainly 
stated, with the considerations on which they are based, a» well as the rates obtained 
by strict application of these instructions. 

Check by Money Profit per Thousand Feet. 

As indicated on page 39, the dc liars and cents profit per thousand feet is a direct and 
tangible check which should always be used. Viewing the timber, the chance, anil the 
investment in a broad way, and comparing them with corresponding operations, the 
appraiser should satisfy himself a^ to the fairness and sufficiency of this amount. 

Prices Bid in Former Sales. 

Prices bid for timber in previous sales, with due allowance for differences in quality, 
accessibility, and other telling conditions, also afford an excellent check. As far aa 
practicable their fairness should be gauged by observation of the succeeding opera- 
tions. Bid prices are of special value as checks because indicating just what local 
operators, under all the conditions involved, National Forest sale regulations included, 
are willing to pay for stumpage. As a general rule, the rate of profit indicated by cur- 
rent bids should govern appraisals in timber comparable in quality and accessibility. 

Current Stumpage Appraisals. 

Uniform stumpage rates for timber of the same general quality and accessibility in 
a given region stabilize the sales business and promote the confidence of purchasers. 
They also afford an excellent check against hasty or erroneous appraisals. Prevailing 
prices should never be applied to the ignoring of the quality of the timber and the 
pioduction costs on a particular chance. The appraiser should, however, check his 
r-'sults by the going and accustomed rates for the general type of stumpage and loca- 
tion, and satisfy himself that any departures are justified. Points of thj> nature 
should be covered in appraisal reports. 

Prices of Private Timber. 

A further check is afforded by the rates at which private commercial stumpage is 
held or sold. When owned by timbermen who know its worth, particularly in regions 
where buying is active, the price of privately owned stumpage represents the con- 
sensus of business judgment as to the sum total of all factors, fluctuating lumber 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



49 



markets, reasonable profits, and logging risks included. Care must of course be 
exercised to consider timber which is comparable in quality and availability and to 
take only prices obtained by owners who are able to secure full value. Another 
point of great importance, particularly in comparisons between large tracts, is that, in 
the cast of privately owned timber, carrying charges for interest and taxes in effect 
double the investment every ten years. Under National Forest sales, with no taxes, 
no interest on deferred payments, and deposits for stumpage only in small install- 
ments in advance of cutting, no such increase in the initial investment takes place. 
This may be offset by the gain to the private owner from increasing values of lumber 
which is only realized in part by the operator under a National Forest contract. As 
a general rule, however, private stumpage in large blocks is worth less than similar 
stumpage on a National Forest. 

METHODS OF APPRAISING STUMPAGE; APPLICATION OF 
PRINCIPLES PREVIOUSLY DISCUSSED. 

The application of the principles of appraising stumpage which have been dis- 
cussed is illustrated by the following concrete examples. 

SYMBOLS FOR ELEMENTS IN APPRAISAL. 

For convenience in appraisals, the following symbols will be used for various ele- 
ments in the calculation. For uniformity and ease in checking, any symbols 
employed — and their use is entirely a matter of convenience — should conform with 
those given. The symbols are all in terms of one thousand board feet. 



Z)=Depreciation. 

P=Profit. 

.4=Average fixed investment. 

W= Working capital. 

V= Residual or wrecking value. 

C=Operating costs. 

Jf=Maintenance. 

G=General expense. 



T=Taxes and insurance. 

i?=Extra costs of logging due to Service, 
regulations. 

5=Selling price of lumber. 
X=Stumpage price. 
£c=All logging costs. 
Mc=A\l manufacturing costs. 



EXAMPLES OF THE INVESTMENT METHOD. 

In the three examples following, the investment method of computing profit has 
been used. 

I. A SMALL OPERATION IN THE ROCKY MOUNTAINS. 

A total stand of 12,610 M feet is available to a central mill site, of which 9,000 M 
feet may be cut under the established methods of marking. This consists of green 
Douglas fir, 76 per cent; green Engelmann spruce, 22 per cent; and merchantable 
dead timber of both species, 2 per cent. 

The applicant's mill is at present located 8 miles from the new setting. The 
initial cost of this null was $6,000. It has been operated 3 years out of a total life 
for small semiportable plants of this type of 10 years. It is therefore reckoned as 
having depreciated one-third and is now rated at $4,000. A cut of 9,000 M feet will 
last it 6 years, at which time it will have an approximate wrecking value of $1,000. 
The appraisal is therefore based upon an operation of 6 years. 

The present value of the operator's logging equipment, horses, sleds, lumber trucks, 

harness, tools, etc., is put at $5,000. Its depreciation is figured at the rate of $600 per 

year, leaving a residual value at the end of the operation of $1,400. The operating 

costs for which working capital is required total $12.75 per thousand feet log scale, 

60813—14—4 



50 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



or $19,125 for the year's cut. 1 The bulk of the lumber is sold and paid for within 
six months after felling, the average turn of the working capital being four months. 
On this basis, with a small margin for contingencies, working capital is figured at 
$8,000. 

The investments and depreciations may be summarized in the standard form, all 
investments being made the first year, and all depreciations prorated evenly over 
6 years. 



Item. 



Logging equipment 

Road construction, 41 miles up creek to mill site, at $300. 

Mo.ing mill (8 miles") and setting up 

Clearing logway and improving spring at mill site 

M ill and equ ip'ment 

W ork ing capital 

Total 



Initial in- 
vestment. 



$5,000 

1,350 

350 

100 

4,000 

8,000 



18,600 



Yearly de- 
preciation. 



$600. 00 

225.00 

58.33 

16.67 

500.00 



1,400.00 



Wrecking 
value. 



Average 
profit- 
bearing 
investment. 



$1,400 



1,000 
8,003 



10,400 



$3,500.00 

787.50 

204.17 

58.33 

2,750.00 

8,000.00 



15,300.00 



In accordance with the standard policy for such operations as given on page 41, 
a profit of 25 per cent on the average investment will be allowed; 25 per cent of $15,300 
is $3,825. This, with the yearly depreciation of $1,400, makes a total of $5,225 to 
be prorated over the annual cut. The equivalent charge per thousand feet log 

scale is ^ ' , or $3.48 per thousand feet. Two dollars and fifty-five cents of this 
1,500 M 

amount is profit and 93 cents depreciation. 

The logging costs may be summarized as follows, all in thousand board feet log 
\»cale: 



Item. 


C. 


M. 


G. 


T. 


E. 


Total. 




$1.10 










$1.10 










$0.40 
.05 


.40 












.05 




.25 
1.60 
1.50 








.25 












1.60 












1.50 




$0.10 








.10 






81.00 






1.00 


Taxes 






SO. 02 




.02 














4.45 


.10 


1.00 


.02 


.45 


6.02 



Logging roads are short, used for the most part less than one year. It is therefore 
simpler to charge the cost of their construction to operating expenses rather than to 
fixed investment. 

Supervision is inserted to cover the personal services of the operator. This is 
based upon an annual salary of $1,500 spread over the cut. Although in fact applying 
to the whole operation, it may as conveniently be charged against logging as split 
between logging and milling. This charge is higher per thousand feet than in a 
large, efficiently organized operation. Its inclusion is necessary, however, to provide 
adequately for the element of personal initiative and enterprise in a sale of this 
character. 

1 This includes an assumed stumpage rate of $3, all logging costs except supervision and all milling 
costs extended to log scale by 10 per cent overrun. The supervision charge is, in this instance, a return 
to the operator himself, coming at the end of the year or whenever a surplus accumulates. It need not, 
therefore, be covered by working capital. The transportation charge from mill to market is also elimi- 
nated, since it is incurred just prior to sale and can be assumed fairly as paid by a portion of the product. 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



51 



Taxes are obtained as a 1 per cent valuation of the average investment in logging 
equipment prorated over the annual cut. This is based upon an assessment of one- 
third of the actual value and a levy of 3 cents on the dollar. 

Milling costs may be summarized likewise, per thousand feet lumber tally. 



Item. 


C. 


M. 


T. 


Total. 


Milling (including sawing, edging, surfacing 25 per cent oicut, and piling). 


$4.00 


50.20 


SO. 04 
.06 


$4.00 
.20 






.04 








.06 




2.50 




2.50 










Total 


6.50 


.20 


.10 


6. SO 







The figure of $4 for milling is the average of 4 mills of this general type and output 
in the region. 

Mill taxes are computed, like logging taxes, as 1 per cent of the average value of 
the property. This includes 330,000 feet of lumber, or two months' cut, 1 which is 
assumed to be carried steadily on hand.^ Insurance is figured as a 2 per cent premium 
on three-fourths of the average value of mill and yard stock. 2 

Selling costs are included in the supervision item of $1, this part of the work being 
handled by the operator personally. 

The lumber is marketed in an agricultural valley, the distributing point being 
approximately 7 miles by wagon haul from the mill. Seventy-five per cent of 
the cut of green timber of both species is sold in the rough as boards and dimension 
stock, at a delivered rate of $16. Twenty-five percent is surfaced for finish and sold 
at a delivered rate of $24. The average lumber selling price of green timber is thus: 

75 per cent rough and dimension at $16 $12 

25 per cent finish, at $24 6 

Average selling price 18 

Dead timber is all cut into rough boards. On account of stain and check, it com- 
mands a lower price than green, averaging $15 per thousand feet. The stumpage 
averages 16 logs per thousand feet. With a circular saw of one-fourth inch kerf and 
relatively inefficient methods of manufacture, overrun can not be placed conserva- 
tively at more than 10 per cent. 

The average lumber selling prices extended to log scale are thus: 

For green timber ($18X1.10) $19. 80 

For dead timber ($15X1.10) 16. 50 

The milling and haulage costs, similarly extended, total $7.48. 
Stumpage rates may then be determined by the formula, X=S —Lc— Mc—D—P, 
all in terms of log scale, as follows: 

For green timber: $19.80-$6.02-$7.48-$0.93-$2.55=$2.82. 
For dead timber: $16.50-$16.98, as above, = -$0.48. 

1 It is assumed that the mill will operate 10 months in the year, cutting 150,000 feet of logs per month, or 
figuring overrun at 10 per cent, 165,000 feet of lumber. 

2 The average value of the mill used in calculating taxes and insurance is $2,750, the average interest, 
bearing investment. The value of the yard stock of 330,000 feet is: Assumed stumpage rate, S3, and logging 

c^ 02 

costs, exclusive of supervision, $5. 02, both reduced to mill-tally basis; that is, =$7.29; together with 

milling costs, S4.20. The latter exclude taxes, insurance, and haulage. The total of $11.49 times 330,000 
makes the average yard stock worth $3,791.70. 



52 APPEAISING STUMPAGE ON NATIONAL FORESTS. 

Putting a minimum price of 50 cents on the dead stumpage, the final prices become: 

2 per cent of $0.98 (difference to be made up) $0. 0196 

98 per cent of $2.82 (on which difference is to be prorated) 2. 76 

?~^ — --=$0. 0071, reduction for each dollar in the price of green timber. 
$2. 76 

Hence the final prices become: For dead timber, $0.50 per thousand feet; for green 
timber, $2.80 per thousand feet. 

The total return of the operator under this calculation is $1 for supervision (personal 
services) and $2.55 on his investment, or $3.55. This is deemed equitable for small 
operations of this type, and checks closely with the monetary profit at which such 
operations are rated ou page 40. 

(Initial capital, $18,800; output, under 10,000 feet daily.) 

2. A MIDDLE-SIZED OPERATION IN THE BLUE MOUNTAINS. 

This chance will cut approximately 80,000,000 feet. Eighty per cent of the stand 
is yellow pine, the remainder Douglas fir and western larch. The operation is planned 
for 10 years at an annual cut, log scale, of 8,000,000 feet. 

The central point of the business is on a trwnk line railroad where the planing mill 
is located. It has a rated value of $15,000. It will be well maintained with a view to 
succeeding operations and should have a residual value of $10,000 at the end of the 
sale. From this central point, an existing common carrier railroad, forming a tap line 
or feeder for the main system, runs near the chance. It is proposed to build a single 
band mill, with a capacity of 40,000 feet of lumber daily, on the sale area. It 
will cost $30,000 and have a residual value of $10,000 at the end of the operation. 
Freight on green rough lumber between these points is equivalent to $2.50 per thousand 
feet. 

Five miles of railroad connecting the mill with the tap line and running up into the 
woods will be used during the entire operation. Its estimated cost beneath the stee' 
is $1,900 per mile. In addition, the following branches will be required: (1) A lateral 
2 miles long, to be used 2 years; (2) A lateral 5 mileo long, to be used 5 years; (3) Short 
spurs, totaling 12 miles, to be used on the average 1 year. These laterals and spurs 
will cost on the average $1,200 per mile beneath the steel; 9 miles of steel all told will 
be required. This will cost $2,200 per mile, and is estimated to be worth half that 
amount at the end of the operation. 

One light engine with gypsy loader and rolling stock, costing all told $12,000, are 
required for log hauling. Their residual value is estimated at $3,000. 

For logging to rail, eight teams will be required. Their cost with harness is $400 
each. Skidding equipment will cost $2,000. The maintenance charge on teams and 
skidding outfits will necessarily be heavy, amounting to $800 a year. With this 
expenditure for maintenance, however, the value of the equipment will be kept close 
to its initial cost. It residual value may therefore b„ reckoned at $3,000. 

Further items of investment may be listed as follows: 



Item. 



Wood camps 

Shop and tools 

Woods and track tools . 
Work ing capital 



Residua] 
value. 



35,000 



The working capital is computed as follows: Current cojts for logging and stumpage 
will be turned every four months. These aggregate $6.28, including an assumed 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



53 



Btumpage rate of $3 for pine (80 per cent) and $1 for fir and larch (20 per cent). The 

freight and milling costs, which average $8.53, log scale, for all species, are turned every 

§6 ^8 $8 53 
two months. The working capital required is thus :? -^-+' ?1 -k—> or ? 3 - 51 wr each 

3 fa 

thousand feet, log scale, in the year's cut. On 8,000,000 feet this, amount, to $28,080. 
Twenty-five per cent has been added as leeway for contingencies, making the total 
$35,000. 
The investments and depreciations may be summarized as follows: 



Item. 



Initial 
investment. 



Number 

of years 

used. 



Annual 
deprecia- 
tion. 



Residual 
value. 



Average 
profltbearing 
investment. 



Planing mill 

Sawmill 

Railway steel 

Main logging railway grade 

First lateral railway grade 

Second lateral railway grade 

Spur railway grades 

Engine, loader, and rolling stock. 
Teams and skidding equipment 

Camps 

Shop and tools 

Woods and track tools 

Working capital 

Total 



315,000 

30,000 

19, 800 

9,500 

2,400 

0,000 

14,400 

12,000 

5,200 

2,000 

1,500 

500 

35. 



153, 300 



$500 

2,000 

990 

950 

240 

600 

1.440 

900 

220 

200 

100 

50 



8,190 



310,000 
10,000 
9,900 



3,000 
3,000 



500 

"ss.'ooo 



71,400 



$12,750 

21,000 

15,345 

5,225 

300 

1,800 

1,440 

7,950 

4,210 

1,100 

1,050 

275 

35,000 



107,505 



The average investment at work in the operation and entitled to profit is thus 
$107,505. Former competitive bids for timber in this region, which is relatively 
accessible and involves but average risks, and for chances which are comparable in 
size and permanency of the operation indicate that a return of IS per cent on the invest- 
ment is a fair going basis for sales of National Forest stumpage. At this rate the annual 
profit (18 per cent of $107,505) amounts to $19,350.90, or $2.42 per thousand feet, log 
scale. 

*R8 1 90 
The annual depreciation charge is -^- ' or $1.02 per thousand feet, log scale. 

The operating costs are estimated as follows: 

Logging per 1,000 feet log scale. 



Item. 


C. 


M. 


a. 


T. 


R. 


Total. 




$0.80 










$0.80 










$0.40 
.04 


.40 












.04 




1.10 
.30 
.30 








1.10 












.30 












.30 




80.10 
.15 
.20 








.10 












.15 












.20 






$0.25 






.25 








$0.02 
.02 




.02 










.02 












Total 


2.50 


.45 


.25 


.04 


.44 


3.68 







54 APPRAISING STUMPAGE ON NATIONAL FOKESTS. 

Manufacture and transportation per 1,000 feet lumber tally. 



Item. 


C. 


M. 


G. 


T. 


Total. 




SI. 90 








$1.90 




$0.20 






.20 




2.50 
2.10 
.60 






2.50 










2.10 










.60 




.10 






.10 






$0.20 


so. or. 

.01 

.07 


.20 








.06 










.01 










.07 








.30 


.30 










Total 


7.10 


.30 


.50 


.14 


8.04 







1 In these iteTis the average yard stock carried at the planing mill is p t at 1,200,000 feet of pine and 300,000 
feet of larch and fir. Mine is credited with an avorage cost of $13.07, and larch and fir with an average cost 
of S10.45. These are based 'pon (1) ass m.ed st mpage rates of $3 for pine and $1 for larch and fir, (2) foxing 
costs of S3.0S and (3). milling and transportation costs ol $7.00 and S6.20, res-ie tively. St m page charges 
and lodging costs are reduced for 10 per cent overr.in. Milling costs are exclusive of taxes, ins -ranee, and 
eelliug charges. 

Not more than 20 per cent of the larch and fir lumber is dressed as compared with 
60 per cent of the pine lumber. The average cost of planing and finishing larch and 
fir is therefore 70 cents per 1,000 feet on the total of these species. The total cost 
of manufacture and transportation in the case of larch and fir is therefore $1.40 less 
than for pine, or $6.64. 

This timber runs from 8 to 10 logs per 1,000 feet. Results obtained in current sales, 
however, indicate that an overrun exceeding 10 per cent can not be used safely in 
etumpage appraisals. Extended for this overrun, the milling and transportation cost 
for yellow pine, log scale, is $8.04X1,100, or $8.84; and for larch and Douglas fir, 
$6.64X1,100, or $7.30. 

From s'udy of current manufacture of similar timber in local mills and compila- 
tion of selling prices during the past two years, the average cut and selling price of 
yellow pine, by grades, are ascertained to be as follows: 



Grade. 







Weight in 


cut. 


Grade price. 


average 
price. 


2 


$46. 00 


$0.92 


8 


34.00 


2.72 


15 


24.00 


3.60 


20 


16.00 


3.20 


25 


12.50 


3.12 


20 


14.00 


2.80 


5 


12.00 


.60 


5 


10.00 


.50 


100 




17.46 







B select and better.. 

C select 

No. 1 shop 

No. 2 shop 

No. 3 shop 

No. 1 comll-on 

No. 2 coirui on 

No. 3 conm.on 

Total 



The average cut and selling price of western larch and Douglas fir, by grades, have 
been similarly ascertained to be approximately as follows: 



Grade. 



Finished stock, flooring, etc. 

No. 2 common ^ 

No. 3 common 



Total. 



Per cent of 
cut. 



Grade price. 



$16.00 
12.00 
10.00 



100 



Weight in 
average 
price. 



$0.96 
6.48 
4.00 



Extended by 10 per cent overrun, the average selling prices, log scale, are: 

For yellow pine, $17.46X1,100, or $19.21. To this should ba added $0.30, the net 

return per thousand feet log scale from the sale of slabwood (0.5 cord per thousand at 

$0.60). 
For larch and Douglas fir, $11.44X1,100, or $12.58. 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 55 

The stumpage rates may now be calculated aa follows: 
For yellow pine: 

Average selling price $19- 51 

Depreciation $1. 02 

Profit 2.42 

Logging 3. 68 

Manufacture and transportation 8. S4 

Total 15. 96 

Balance for stumpage 3. 55 

For larch and Douglas fir: 

Average selling price 12. 58 

Depreciation 1-02 

Profit 2.42 

Logging 3. 68 

Manufacture and transportation 7. 30 

Total 14. 42 



Deficit 1.84 

Establishing the minimum rate of 50 cents per thousand feet for larch and Douglas 
fir, the total deficit of $2.34 on these species may be distributed on the pine stumpage 
as follows: 

Twenty per cent of $2.34 is $0.47, the amount to be taken up by the stumpage price 
of pine. 

Eighty per cent of $3.55 is $2.84, the average stumpage rate which must carry this 

$0 47 
deficit. |^j=$0.165, to be deducted from each dollar of stumpage value of yellow 

pine. 

The final stumpage rates are thus: For yellow pine, $2.97 per thousand feet; for 
larch and Douglas fir, $0.50 per thousand feet. 

Prorating the annual charge for depreciation and profit on net value in:-tead of 
quantity, in accordance with the principles discussed on page 44, stumpage prices by 
species are obtained as follows: 

Deducting operating costs only from average selling prices, the margin is: For 
yellow pine, $6.99 per thousand feet, log scale; for lajch and fir, $1.60 per thousand 
feet, log scale. 

With a yearly cut of 6,400,000 feet of pine and 1,600,000 feet of larch and fir, the total 
margin is $47,296. The sum of yearly depreciation and profit is $27,541. Dividing the 
latter figure by the former, it is ascertained that each dollar of margin must pay $0,582 
toward depreciation and profit. On yi?llow pine, therefore, these charges amount to 
$4.07 per thousand feet, leaving $2.92 for stumpage. On larch and fir, they amount 
to $0.93 per thousand feet, leaving $0.67 for' stumpage. The average price is the same 
as that obtained under the first computation. The second method is to be preferred 
aa more logical and less arbitrary. 

3. A LARGE OPERATION IN THE IDAHO PANHANDLE. 

This chance is estimated to cut, under Service methods of marking, 600,000,000 feet 
in a 20-year operation. The timber consists of the following species: 

Percent. 

White pine 27 

Yellow pine 4 

Lodgepole pine 1 

Engelmann spruce 3 



Per cent . 

Western larch and Douglas fir 33 

Western red cedar 25 

White fir 7 



56 APPRAISING STUMPAGE ON NATIONAL FORESTS. 

The chance is exceptionally adapted to railroad logging. From a central point, 
where the system of logging spurs would logically begin, the most practicable route to 
the nearest railroad connections requires 32 miles of track. The first 20 miles of this 
distance taps a region of extensive agricultural resources, behind it lies a heavily 
timbered belt which contains upward of 6,000,000,000 feet. There is little doubt that 
permanent traffic in timber and agricultural products will maintain this portion of the 
railroad as a common carrier, and that considerable freight outside of the National 
Forest sale will contribute to its support from the outset. 

The cost of this portion of the railroad is estimated at $20,000 a mile. Two-fifths of 
the total expenditure of $400,000 will be made two years, and three-fifths one year in 
advance of the beginning of the operation. Including interest on these amounts, for 
two and one years, respectively, at 6 per cent, the initial investment is computed as 
$433,000. This investment does not depreciate, but with adequate charges for main- 
tenance remains intact throughout the operation. The permanent traffic then avail- 
able will give it a residual value equal to the first cost. 

In the stumpage appraisal this tap-line railroad may be treated in either of two ways. 

First, it may be handled as an integral part of the operation, like other investments. 
In that case, because of its permanency and low risk, a return of 10 per cent annually 
is believed to be equitable. It is but fair, furthermore, to charge a portion of this re- 
turn to the outside traffic available for the road. It is the appraiser's judgment that 
such outside traffic during the sale period as a whole should net $25,000 a year over and 
above its proportionate share of the cost of rolling stock, operation, and maintenance. 
This leaves $18,360 as the annual charge for profit on the tap line to be borne by the 
National Forest stumpage, in addition to its portion of the cost of operation, main- 
tenance, and rolling stock. 

Second, the tap line may be regarded as an independent business enterprise. In this 
case its only relation to the timber sale is as a common carrier which will transport 
the product on a freight-tariff basis. A freigh t- tariff , under this assumption, is thus sub- 
stantiated for the combined charges for rolling stock, operation, maintenance, and 
profit under the first assumption. In comparison with other railroads making similar 
hauls, the freight rate is figured at 55 cents per thousand feet of logs, log cars being fur- 
nished and maintained by the shipper. 

The remaining 12 miles of railroad will be a logging road primarily, but will tap 
fully as much private as Government timber. From careful study of the location and 
ownership of this timber, it is concluded that to prorate the cost of the logging railroad 
three-fifths to the National Forest chance and two-fifths to adjacent private stumpage 
will be safe and equitable. The cost of this main logging road, or feeder, including 
steel, is put at $6,000 per mile. The initial investment, $43,200 of which is to be car- 
ried by the Government timber, will be fully depreciated during the 20-year period 
allowed for the operation. The average investment in the feeder should return the 
same profit allowed for the capital used in the operation as a whole. 

The best location for a manufacturing plant is 92 miles from the chance, at a good- 
sized valley town. The low elevation, making conditions for seasoning lumber and 
continuous operation of the mill much more favorable, and better facilities for railroad 
shipments more than offset the distance from the timber. This location will require 
a log haul of 60 miles from the end of the tap line over an existing railroad, at a quoted 
charge of 80 cents per thousand feet log scale with cars furnished by the shipper. 

The manufacturing site is estimated to cost $25,000. This will be a permanent in- 
vestment, in a rapidly growing town, subject to no risk and with every prospect of 
appreciation in value. As in the case of the tap line, therefore, no depreciation will 
be figured and a return of 10 per cent throughout the life of the sale will be adequate. 
With an annual cut of 30,000,000 feet, this will amount to approximately 8 cents per 
thousand feet, log scale. The plant itself, a double-band sawmill and planing mill, 
will cost $255,000. The location is one of the most permanent to be found anywhere 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



57 



in the West, in a large valley whose drainage contains upward of 30,000,000,000 feet 
of virgin timber. It can be fairly assumed, therefore, that the plant will have a life 
of at least 30 years, or a residual value at the end of the present operation of $85,000. 

The tract will be logged by railroad spurs extending from the end of the feeder up 
each of its three main watersheds. Three miles of main logging spur will develop the 
first watershed, which will furnish about four years' cut at 30,000,000 feet of logs an- 
nually. Three miles of main spur must then be constructed to the junction of the sec- 
ond and third watersheds, each of which will furnish about eight years' supply of logs. 
An extension of the main spur 9 miles up each of these streams will be necessary. 
Approximately 58 miles of branch spurs will be required on the three watersheds. 
These branches can, however, be operated with 8 miles of steel in continuous use. 
The logging will require, therefore, 3 miles of steel for the main logging spurs during 
the first four years, thereafter 12 miles; and 8 miles of steel for the branch spurs through- 
out the entire sale. Seventeen and one-half per cent of the timber, on agricultural 
lands which are to be cut clean, will be logged by steam machinery. The rest will be 
logged with horses. Woods improvements will consist of trail chutes and a few short 
pieces of flume. 

The investments required in the operation, aside from the tup line and mill site, are 
summarized in the following table: 

Summary of Investments. 



Item. 



Manufacturing plant 

Main logging railroad 

Main logeing spurs: ' 

3 miles steel, at $3,090 

3 miles grading, at $1,500 

9 miles stee 1, at $3,090 , 

3 miles grading, at $l,i;00 

9 miles grading at $1,600 

9 miles grading, at $1,500 

Switch layouts 

Branch losing spurs: 

8 miles steel, at $2,300 

58 miles grading, at $1 ,200 

Logging and railroad equipment: 3 

4 donkey engines, at $7,500 

120 sets teams and outfits with woods 

tools, at $700 

7 locomotives, at $12,000 ' 

300 log cars, at $500 s 

6 log jammers, at $5,000 

Miscellaneous equipment: 

Portable railroad camps 6 

Log camps 

Railroad shop and equipment 

Working capital 8 



Initial in- 
vestment. 



Total. 



$255,000 
43, 200 

9,270 

4,500 
' 27,810 

4,800 
14,400 
13,500 

1,000 

18,400 
09,600 

30,000 

84,000 
84,000 
150,000 
30,000 

0,000 

9,000 

2,000 

220,000 



Number of 
years used. 



1,076,480 



20 



Annual 
deprecia- 
tion. 



;,500 
:,160 

463 

225 
,112 
240 
720 
075 
50 

920 
i,480 



,200 
,200 
,500 
,500 

300 
450 
100 



Residual 
value. 



$85,000 



5,562 



220,000 



310,562 



Average 
profit- 
bearing in- 
vestment. 



$174,250 
22,680 

4,866 
562 
13,905 
2,040 
3,240 
3,037 
525 

9,660 
5,220 

S,250 

12,600 
23, 100 
41,250 
8,250 

1,650 

1,125 

1,050 

220,000 



557,260 



1 All items for railroad steel and iron are depreciated at 5 per cent annually. 

2 Two years is the average period of use of each spur grade. 

8 The initial investments include replacements throughout the life of the sale. Logging machinery, 
locomotives, and rolling stock depreciate completely in 10 years; hence double the average stock in use at 
any given time is figured. Teams and tools depreciate completely in 5 years; hence four times the average 
stock is provided for. 

< Three locomotives will be sufficient for the first 10 years; for the last 10 years four will be needed. 

8 This is based upon log transportation for the entire distance over tap line and present railroad to the 
manufacturing plant, requiring 150 cars in continuous use. 

8 Two complete sets, at $3,000 each and each lasting 10 years, are provided for. 

7 Four years is the average period of use of the log camps. 

8 The working capital is arri< ed at as follows: It is estimated that an average yard stock equivalent to 
about one-third of the annual cut must be kept on hand. This has a cost value, excluding depreciation 
and profit and including an assumed a\ erage stumpage price of $1.50, of $12.99 per thousand feet log scale 
(taking the lower schedule of costs, p. 59). His also figured that an average supply of 3,000,000 feet of logs 
should be kept ahead of cutting at the mill, and 2,000,000 feet of logs ahead of railroading in the woods. 
The cost value of the former is $7.59, and of the latter, $5.03. Stumpage at $1.50 is included in each case. 
Accounts receivable are estimated at $32,475. This is equivalent to one month's sales, 2,500,000 feet, at a 
cost value of $12.99. While many sales will be made on 60-day payments, it is believed that they will be 



58 



APPEAISING STUMPAGE ON NATIONAL FORESTS. 



This operation involves the development of a manufacturing and logging industry 
in an entirely new region and the exploitation of a chance now wholly inaccessible. 
Risks beyond the ordinary are involved in: 

1. Climatic conditions, no large operations or extensive construction work having 
been conducted heretofore in these mountains. 

2. Acquisition of additional timber to carry two-fifths of the investment in the main 
logging railroad. 

3. Working out successfully the main transportation problem which involves (1) 
satisfactory traffic and log haul agreements with an established common carrier, and 
(2) enlisting other capital to construct the tap line or developing outside traffic to 
carry the tap line if built as part of the lumbering plant. 

Under these conditions a return of 20 per cent annually on the invested capital is 
deemed equitable and necessary to place the chance upon the market. 

With an average investment of $557,260, the annual charge for profit is thus 3111,452; 
or, on an annual cut of 30,000,000 feet, $3.68 per 1,000 feet. The annual charge for 
depreciation is $1.27 per 1,000 feet. 

The logging costs are summarized as follows: 



Stump to upper terminus of tap line. 



Item. 


C. 


M. 


G. 


T. 


R. 


Total. 




$0.70 
1.55 










SO. 70 












1.55 










SO. 55 
.02 


.55 












.02 




.21 
.20 
.36 








.21 












.20 












.36 




SO. 11 
.27 
.10 








.11 












.27 












.10 










.12 


.12 










SO. 15 


.15 








SO. 40 


.40 














Total 


3.02 


.48 


.40 


.15 


.69 


4.74 



1 Based up)n 17.J per cent p:> ver logging at SI. 22 and 82$ percent horse logging at SI. 63. 
2 ' "'his is a special silvicultural requirement proposed for the sale area. 

3 'his charge covers trail chutes, flumes, landings, and other current improvements aside from railroad 
grades, which are provided for under fixed investments. 



The cost of manufacture and sales, exclusive of depreciation, has been avera 
for a number of large mills in the Inland Empire similar to the proposed plant at 
$4.50 per thousand feet lumber tally. Mill scale studies conducted at these plants 
indicate that 20 per cent is a conservative figure for overrun under Forest Service 
scaling in this class of timber. The milling charge per thousand feet log scale is 
thus $4.50X1,200, or $5.40. 

offset bv an e iui . alent amount of cash business. The average outstanding deposit for stumpage is put at 
$5,000; and the average amount required as a margin to meet contingencies at $20,000. These items are 
then: 

10,000,000 feet of yard stocV, at $12.99 $129,900 

3,000,000 feet of logs at mill at $7.59 22, 770 

2,000.000 Teet of logs on landings, at $5.03 10, 0;i0 

Accounts recei able 32, 475 

Running deposit on stumpage 5, 000 

Contingencies 20,000 

Total 220, 205 

This mav be c'iec v ed from the total yearly operating cost and frequency of turn. The cost of the year's 
cut. eiclusi e of depreciation and profit, is $389,700 (30.000,000 at $12.99). This would indicate an average 
turn of about seven months— which is liberal but not excessive for a large operation of this nature. 



APPRAISING STUMPAGK ON NATIONAL FORESTS. 



59 



If the appraisal is based upon the assumption that the tap line can be constructed 
practically as a common carrier independent of the lumbering operation, the only 
other charges to be taken into account are for freight on logs to the manufacturing 
plant, aggregating $1.35 per thousand feet log scale. 

If it is assumed that the tap line must be built by the lumbering company as part 
of the operation, under the conditions above stated, additional charges are necessary, 
as follows: 

Profit on portion of tap line investment ' $0.61 

Depreciation of additional rolling stock required 2 08 

Profit on average investment in additional rolling stock 2 09 

Railway operation 3 25 

Railway maintenance 3 10 

Maintenance of additional rolling stock 04 

Total : 1. 17 

The charge for log freight from the end of this tap line to the mill is $80 per M feet 
in any event. 

Profit and production cost, exclusive of stumpage price, may then be sum- 
marized as follows: 



Return on investment in mill site 

Profit 

Depreciation 

Lodging costs 

Milting costs 

Tap-line transportation 

Main-line transportation 

Total 



With tap line 
as part of 
operation. 




17.14 



With tap line 
as independ- 
ent common 
carrier. 



SO. 08 
3.68 
1.27 
4.74 
5.40 
.55 
.80 



16.52 



Where different methods of handling the main transportation problem should be 
considered, as is frequently the case in inaccessible chances, it is desirable for the 
appraiser to present the cost data under each. In this instance the choice obviously 
lies between a more and a less conservative policy as to whether the sale of National 
Forest stumpage should await the general economic development of the region or 
whether the Government timber should itself carry the principal burden of such 
development. Ordinarily the more conservative policy will be followed under such 
conditions. Stumpage prices will be based, therefore, upon the lower schedule of 
costs. 

The average lumber value of the white-pine timber on the tract has been deter- 
mined from three tables, which follow. The first gives, for sound timber, the aver- 
age value by grades of stumpage of varying size, as indicated by the number of logs 
per thousand feet. 

i $18,360 prorated annually over 30,000,000 leet. (See p. 56.) 

* The additional equipment required is 2 engines in current use. Their depreciation, at 10 per cent 
annually, and average investment are figured as 32,400 and S13.200, respectively. Profit on the latter 
figure is allowed at 20 per cent. 

» These are the estimated proportions of the total costs of operation and maintenance chargeable to the 
timber. (Seep. 56.) 



60 APPBAISING STUMPAGE ON NATIONAL FORESTS. 

Sound White Pine. 





Grade 
value per 
thousand. 


Logs per thousand. 


Grade. 


18 


6 


3 




Per cent 
of grade. 


Propor- 
tional 
value. 


Per cent 
ofgTade. 


Propor- 
tional 
value. 


Per cent 
of grade. 


Propor- 
tional 
value. 




$45. 00 
38.00 
27.00 
20.00 
25.00 
21.00 
15.00 
11.00 
6.00 


0.14 

1.97 

3.72 

.43 

47.20 

21.73 

21.03 

3.66 

.12 


$0.06 

.75 

1.00 

.09 

11.80 

4.56 

3.15 

.40 

.01 


1.57 
6.10 
8.88 
7.91 


SO. 71 
2.32 
2.40 
1.58 


12.26 
12.67 

9.29 
24.41 
15.19 

9.09 
14.97 

2.07 
.05 


$5.52 


C select 






2.51 


Shop 


4.88 




29.92 ' 7.48 
18. 10 ! 3. 86 
22. 18 3. 33 


3.80 




1.91 




2.25 




4.85 
.19 


.53 

.01 


.23 










Total 




100 


21.82 


100 


22.22 


100 


25.91 









The second table gives similar data for defective white pine. 

Defective White Pine. 





Grade 
value per 
thousand. 


Logs per thousand. 


1 


Grade. 


15 


10 






Per cent 
of grade. 


Propor- 
tional 
value. 


Per cent 
of grade. 


Propor- 
tional 
value. 


Per cent 
of grade. 


Propor- 
tional 
value. 




$45.00 
3S.00 
27.00 
20.00 
25.00 
21.00 
15. 00 
11.00 
6.00 


0.91 

3.52 

7.17 

.21 

18. 23 

15. 38 

28.24 

23.77 

2.57 


$0.41 
1.34 
1.94 

.04 
4.56 
3.23 
4.24 
2.61 

.15 


0.93 

- 7.85 

11.32 

1.83 
14.12 

6.94 
27.85 
25. 2S 

3.88 


$0.42 
2.9S 
3.06 

.37 
3.53 
1.46 
4.18 
2.78 

.23 


10.94 
11.60 
11.60 
9.87 
4.68 
3.77 
19.21 
22.41 
5.92 


$4.92 




4.41 




3.13 


Shop 


1.97 




1.17 




.79 




2.88 




2.47 




.36 






Total 




100 


18. 52 


100 


19.01 


100 


22.10 









The third table sets forth the run of the white-pine stumpage on the chance, by 
size classes of sound and defective timber, respectively, with the average cut of 
grades and grade values. 



Grades and Grade Values or White Pine. 



White pine. 



3-log, sound 

6-log, sound 

18-log, sound 

4-log,' 28 per cent defective. . 
10-log, 32 per cent defective. 
15-log, 32 per cent defective. 



Average value per thousand 

Deducting 6 per cent depreciation in yards . 



Per cent of 

log class 

In the 

stand. 



Lumber value. 



Per 

thousand. 



$25. 91 
22.22 
21.82 
22.10 
19.01 
18.52 



Propor- 
tional. 



$6.22 
3.56 
4.36 
3.54 
2.28 
2.22 



22.18 
1.32 



20.86 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



61 



The mill-run prices of the other species have been similarly determined, as follows: 

Yellow pine 116. 87 

Lodgepole pine 15. 00 

Engelmann spruce 14. 00 

White fir 13.00 

Larch, Douglas fir, and cedar 12. 00 

In determining the total value of each species log scale, it is figured that in addition 
to an overrun of 20 per cent a net return of 40 cents per thousand feet will be obtained 
for white, yellow, and lodgepole pine from the manufacture of lath and a net return 
of 30 cents per thousand feet for all species from the sale of slab wood and mill waste. 
The log-scale values of the respective species are therefore: 

i 

White pine, $20.86, extended for 20 per cent overrun $25. 03 

Lath 40 

Slab wood and mill waste 30 



25.73 



Yellow pine, $16.87, extended for 20 per cent overrun 20. 24 

Lath 40 

Slab wood and mill waste 30 



20.94 



Lodgepole pine, $15, extended for 20 per cent overrun 18. 00 

Lath 40 



Slab wood and mill waste 



.30 



18.70 



Engelmann spruce, $14, extended for 20 per cent overrun 16. 80 

Slab wood and mil] waste 30 



17.10 



White fir, $13, extended for 20 per cent overrun 15. 60 

Slab wood and mill waste 30 



15.90 



Larch, Douglas fir, and cedar, $12, extended for 20 per cent 

overrun 14. 40 

Slab wood and mill waste 30 



14.70 



If the total charge for profit and depreciation, $5.03 per thousand feet, be pro- 
rated on the margin between operating costs and selling price of the respective species, 
in accordance with the method discussed on page 45, 1 the following stumpage prices 
are obtained: 



White pine $3. 56 

Yellow pine 2. 36 

Lodgepole pine 1, 81 



Engelmann spruce $1. 41 

Whitefir 1.11 

Other species 81 



'The average margin is S6.63 (average selling price, $18.12, less the operating costs, $11.49). 

U^s-StUS to be taken for each dollar of margin to make up profit and depreciation. With this figure 

5nd the difference between operating costs and the selling price of each species, the stumpage rates are 
readily derived. 



62 APPRAISING STTJMPAGE ON NATIONAL FORESTS. 

EXAMPLES OF THE OVERTURN METHOD. 

In the three examples following the overturn method of computing profit has been 
used. 

1. SMALL SHORTLEAF-PINE OPERATIONS IN ARKANSAS. 

In this region logging is easy and readily contracted at established rates. A great 
deal of milling business is done on small capital. Current bids indicate that relatively 
low profits are satisfactory to the operators. 

The chance is estimated to contain 20,000,000 feet, to be cut in five years. The 
timber will be logged to small, portable mills for sawing; then dried in "smoke kilns" 
for several days; thence hauled to a point on a common-carrier railway at which the 
operator's finishing plant is located. Logging conditions are very similar over the 
entire tract, but the chance is divided into five operating units, because of the differ- 
ent lengths of haul from mill to rail. Hauling distance is the determining factor in 
fixing stumpage rates. 

Logging operations in this region are very simple, because of the rough country 
and thin, scattered stands. The timber runs from 1J to 2| (rarely 3) logs per tree and 
from 8 to 10 logs per thousand feet. It is very sound, less than 10 per cent of the logs 
showing any defect. 

Small portable sawmills, cutting from 8,000 to 16,000 feet per day and costing from 
$1,200 to $3,000 each, are set up in "hollows" or narrow valleys, where from 600,000 
to 2,000,000 feet of logs can be brought in by wagon haul. Log haul to the mill sites 
for the area as a whole seldom exceeds 3 miles, and the average haul is 1£ miles. 

Logging and milling costs in the region are very uniform and easily standardized. 
Felling, bucking, and brush disposal is usually contracted at $1 per thousand feet, 
the cutters furnishing their own tools, oil, etc. Bunching logs, loading on wagons, 
and hauling to the mill is done either by contract or with the operator's teams. Con- 
tract rates are usually $1.25 for the first quarter mile and 25 cents for each additional 
quarter mile, this price including what little road building is necessary, which may 
cost $30 per mile. A 1-mile haul thus costs $2 by contract, and an average haul of 
H miles $2.50, four to five trips per day being made at that distance, with from 
250 to 350 feet per team. The price is so based as to allow the contractor from $3 
to $3.50 per day for himself, wagon, rigging, and two mules; hence it is not certain 
that the cost of contracting can be reduced if the operator logs his own timber. 

Nine or ten men are employed at the sawmill, cutting as many thousand feet a day. 
As an average for 5 miles examined cutting from six to sixteen thousand feet per 
day, wages aggregate $1.50 per thousand feet. This includes piling in the smoke 
kilns, where most of the lumber stays about a week before hauling. 

Lumber is cut a little scant, so that 2-inch lumber when seasoned measures 1| 
inches and inch stock about thirteen-sixteenths. On account of the long lumber 
haul, No. 3 common boards are not saved, but burned with the slabs and edgings. 
Under these conditions the cut of No. 2 and better grades was found to overrun log 
scale by 5 to 10 per cent, but this overrun is almost wholly lost by shrinkage at the 
planer. 

Lumber is hauled to rail by contract, at $2 for a 7 to 8 mile haul, $3 for an 11 or 
12 mile haul, $3.50 for a 14-mile haul, and $4 for an 18-mile haul. The roads are 
hilly, but otherwise fairly good except in wet weather. A team will haul 900 to 
1,100 feet of half-dried lumber 12 miles and return in a day. 

The investments required to cut this body of 20,000,000 feet in five years may 
be tabulated as follows: 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



63 



Item. 



Moving and setting up mill, 10 sets, at $300. 

Logging roads, 100 miles, at $30 

Logging teams, 15, at $400 » 

Wagons and harness, 15 outfits, at $100'... 

Sawmills, 2, at $3,000 2 

Planer and dry kilns 2 

Real estate 3 

Working capital < 



Total. 



Initial 

investment. 



Number 

of years 

used. 



$3,000 
3,000 
6,000 
1,500 
6,000 
8,000 
2,000 
4,500 



31,000 






A nmial 
deprecia- 
tion. 



$eoo 

600 
900 
225 
420 
560 



3,305 



Residual 

value. 



$1,500 
375 
3,900 
5,200 
2,000 
4,500 



17,475 



Average 

profit- 
hearing 
investment. 



$600 
600 
4,200 
1,050 
5,160 
6,880 
2,000 
4,500 



24,990 



1 Depreciated at 15 per cent annually. 

2 Depreciated at 7 per cent annually. 

8 Exclusive of residence, store, and small farms, which are self-sustaining. 

< Consists of lumber at planer, $3,000, and lumber at sawmills, $1,500. Otherwise the turn is sufficiently 
quick to pay operating costs directly from sales of the product. 

Note.— One year is taken as the average period of use of the money required for mill sets and logging 
roads. 

The production costs, figuring an annual cut of 4,000,000 feet, arc: 

Depreciation ($3,30o-f-4,000,000) $0. 83 

Felling, bucking, and brush disposal, contract price 1. 00 

Team maintenance and labor, bunching and hauling to mill 2 

Sawmill labor 

Labor at kiln and planer (labor of 15 men, $26.25, to plane, run through dry 

kiln, and load, prorated on 20,000) 

Taxes and insurance (annual amounts — $400 and $500, respectively) 

General expense 

(The total annual amounts are: Supplies and repairs, $150; superintendent 
$1,200; bookkeeper, $900; general office expenses, $390.) 

Total production cost, exclusive of stumpage and lumber haul 7. 61 

The average cost of the lumber haul, from planer to rail, is $3 per thousand feet. 
The net price of the lumber at the shipping point has averaged $16 per thousand feet 
for the past 15 months. The profit on overturn is put at 23 per cent, which corre- 
sponds with the general returns from such operations in the region. The average 
stumpage price is thus $16— $10.61— $1.23 ($10.61), or $2.95. This gives the operator 
a profit of $2.44 per thousand feet, or a gross annual return of $9,760. It is equivalent 
to a return of 39 per cent on the average investment. 

The stumpage price may be adjusted approximately between the several units in 
the chance, to provide for variations in the cost of lumber haul, as follows: 



2.00 
1.50 

1.32 
• 22J 
. 73J 



Item. 


Unit A. 


Unit B. 


Unit C. 


Unit D. 


Unit E. 




$7.61 
3.50 
2.44 


S7.61 
3.50 
2.44 


$7.61 
2.50 
2.44 


$7.61 
3.75 
2.44 


$7.61 






Profit 










13. 55 
16.00 
2.45 


n. r.r, 
16.00 
2.45 


12.55 
16.00 
3.45 


13.80 
16.00 
2.20 


12 55 








3 45 







2. A LOGGER S SALE IN NORTHERN MONTANA. 

A chance on a drivable stream tributary to the Kootenai River contains 14,000,000 
feet, running 76 per cent yellow pine, 16 per cent western larch, and 8 per cent Bougias 
fir. The timber averages from three to four logs to the tree and eight logs to the thou- 
sand feet. The season of high water L short and no satisfactory drive can be handled 
without cleaning about 6 miles of stream bed and constructing two splash dams. The 
stream has never been driven before. With these improvements, it will be practicable 



64 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



to drive from two to four million feet annually 6 miles to the Kootenai River. The 
operation will, therefore, extend over four logging seasons. 

About one-fourth of the timber can be skidded directly from the stump to the land- 
ings. Another fourth can be drayed to the creek over an average distance of H miles. 
Where topography is suitable, logs will be skidded short distances to chutes and han- 
dled through them to the creek. Approximately 30 per cent of the timber will be 
logged in this way. The rest, on account of uphill dopes, must be loaded on sleds 
and hauled to the landings. 

The following investments will be required: 



Item. 


Initial 
investment. 


Number 

of years 

used. 


Annual 
deprecia- 
tion. 


Residual 
value. 


Average 
profit- 
bearing 
investment. 




$1,500.00 

1,200.00 
2,500.00 
2,000.00 
1.500.00 
500. 00 
5, 000. 00 
8,000.00 


4 
2 
2 
4 
4 
2 
4 
4 


S375. 00 
300. 00 
025. 00 
500. 00 
375. 00 
125. 00 
500. 00 




8937. 50 


3 miles of dray road, at S400 




150. 00 


1,000 rods of chute, at §2.50 




937. 50 


2 splash dams, at 51,000 




1,250.00 






937. 50 






187.50 


Teams, sleds, drays, and woods tools 


53,000.00 
8,000.00 


4,250.00 
8,000.00 






Total 


22,200.00 




2,800.00 


11,000.00 


16,950.00 









1 The logging season covers 5 months, from Nov. 1 to Apr. 1. Logging costs, exclusive of breaking rollways 
and driving, total * Mi- 1 , ami the stumpago price is assumed to be $2. The average cut is 700,O0nfeet of logs 
per month, involving a cost for stumpage and logging of $3,514. It is figured that sufficient capital must be 
furnished to run the camp 2 months, or $7,028, with a margin of 51,000 for contingencies. The logs are 
delivered in Kootenai River and paid for in May. Driving charges and logging costs for the last 3 months 
of the season can usually be carried on the operator's books until the logs are sold. Often, indeed, contracts 
are made under which part payment is advanced on the scale of the logs in rollways. 

Logging costs are summarized as follows: 

Depreciation of fixed investments ($2,800-4-3, 500,000) $0. 80 

Felling and cutting, by contract 70 

Swamping 40 

Brush disposal 25 

Skidding 45 

Chuting, draying, and hauling 40 

Tote team 03 

Horse feed 15 

Blacksmithing and repairs 14 

Decking in rollways 30 

Breaking rollways < 15 

Driving to Kootenai River 30 

General expense, clerk, etc 20 

Total 4. 27 

The current log price for mixed runs of these species on Kootenai River is $7.50 ' 
per thousand feet. The cost of driving downstream 25 miles to a large going mill, 
which forms the only available market, and booming is $1 per thousand feet. The 
standard manufacturing cost at this plant, including depreciation on mill and equip- 
ment, is $5 per thousand feet, lumber tally. The normal overrun in this timber is 
20 per cent. This is reduced, however, by loss in driving and storage, to 12 per cent. 

The average mill-run lumber selling prices are $15 for yellow pine and $12 for larch 
and Douglas fir, or for the chance: 

Yellow pine, 76 per cent, at $15 .• $11. 40 

Larch and fir, 24 per cent, at $12 2. 88 

Average price 14. 28 

1 In this instance, however, the manufacturers furnish a part of the capital required by the loggers, 
which has the effect of an increase in the log price. 



APPRAISING STUMPAGE ON NATIONAL FOEESTS. 65 

Fifteen per cent profit on overturn is equitable for the cost of the main river drive 
and of manufacturing. Aside from loss in driving, the risk, at this large, well- 
developed plant, is comparatively slight. On the other hand, a profit of 35 per rent 
on overturn is deemed but fair to the logger, whose entire success depends upon the 
development and use of a stream hitherto undriven. 

Using the overturn formula which provides separate rates of profit for logging and 
manufacturing, the stumpage price is determined as follows: 

A'=$15.99 ' -$4.27 - .35($4.27) -$1 -$5.G0 ' - .15($l+$5.60). 
A"=$2.64. 

The logger's profit, as thus computed, is 35 per cent of $4.27, or $1.49. The manu- 
facturer's profit is 99 cents. 

At the prevailing log market the logger's profit would be$7.50-(4.27+2.64),or 59 
cents, a rate on the overturn of 14 per cent. This indicates that the appraisal is high 
for the log market but equitable for the lumber market, allowing a total profit of $2.48. 
The latter should govern the appraisal. 

This operation is typical of small sales to loggers who sell their cut to large going 
mills. As in this instance, the log market is usually an unsafe basis for appraisal. 
Investments are small as a rule, particularly where stream driving is employed. 
Twenty-five per cent return on the average investment in this operation, using a high 
rate on account of the risks involved, would yield a profit of $1.21 per thousand feet. 
Rarely will a straight investment return at the usual rates give an adequate logger's 
profit in such cases. If a return of 25 per cent on the average investment were supple- 
mented by a supervisory charge for the personal services of the contractor, however, 
no such charge being included in the operating costs, a practicable margin would be 
afforded. In this instance the greater part of eight months each year is spent by the 
purchaser on the logging operation. A salary of $150 per month as foreman would 
add $1,200 a year, or 34 cents per thousand feet, to the returns from the enterprise. 
The total return thus realized, $1.55, would make the sale a good logging proposition. 

The alternative method of determining profit on manufacturing in sales of this char- 
acter is as a percentage of the average investment in the milling plant and working 
capital required to run it, prorated over its total annual cut. The average milling 
investment in the case discussed may be put at $275,000, with an average yearly cut, 
log scale, of 30,000,000 board feet. A return of 12J per cent on this mill investment 
may be regarded as equitable. This calls for an annual sum for profit of $34,375, or 
$1.14 per thousand feet of logs manufactured. In lieu of this figure, a standardized 
milling profit, found by experience to be generally applicable throughout the region, 
might be used. 

3. A SALE OF TIE AND MINING TIMBER IN WYOMING. 

A chance containing 60,000,000 feet of lodgepole pine is to be cut out in five years. 
Its products, with their average selling prices delivered at the railroad, are as follows: 



Product. 


Amount. 


Per cent 
of stand. 


Average 
price. 




518,400 pieces 


27 
54 
12 

7 


2 »0. 57 




1,036,800 pieces 

720,000 pieces 


.60 




.30 




4,200,000 feet 


18.00 









i Selling price and milling cost are extended for 12 per cent overrun. 

2 90 per cent standard, at $0.60; 10 per cent seconds, at $0.30. 

3 Side 1 imber only made in cutting sawed ties. 



60813—14- 



66 



APPRAISING STUMPAGE ON NATIONAL FOEESTS. 



The operation of the chance will require the construction of 27 miles of flume from 
the timber to a river in the main valley below the mountains, down which the ties 
and other products will be driven to a small storage and loading yard at the railroad. 
A dam must be built to form a storage reservoir on the sale area, into which the timber 
is delivered by branch flumes, and two additional dams to control the supply of water 
for the reservoir and flumes. A sawmill with a daily capacity of 50,000 feet will be 
built at the outlet of the reservoir to slab or saw the larger logs into ties with a small 
by-product of side lumber. 

An old freight road running near the chance must be repaired and 12 miles of addi- 
tional road built to reach all of the camp sites; 35 miles of telephone line are required, 
paralleling the flume, to connect the sawmill, headquarters camp, and flume camps 
with the office at the railroad. Unloading ground and storage yards at the latter point 
must be purchased at a cost of approximately $1,000; and $1,200 expended for a boom 
in the river and a jack-chain system to land the ties and other timbers in the yards. 
Office buildings will, however, be rented. Horse skidding and sled hauling to the 
reservoir or branch flumes will be employed exclusively. 

The commissary and store which will be maintained at the headquarters camp are 
not included in the appraisal. (See p. 13.) This enterprise, including the construc- 
tion of the buildings used, the furnishing and hauling of supplies, and the employment 
of a cook and storekeeper, is regarded as distinct from the timber sale. The seasons 
for various parts of the operation are: 

Cutting, June 1 to January 31, eigfet months. 

Skidding, July 1 to February 28, eight months. 

Hauling, November 15 to March 15, four months. 

Milling, May 15 to October 15, five months. 

Fluming, May 15 to October 15, five months. 
The investments necessary will be tabulated in the usual form. 



Item. 



27 miles of flume, at $2,500 

Main reservoir dam 

2 side dams, at $1,000 

35 miles of telephone, at $30 

Sawmill 

Repairs on freight road 

12 miles of new road, at $300 

Headquarters camp, stables, etc . 

Woods camps (4 sets) 

60 teams, at $350 

40 sets draft harness, at $60 

35 sets skidding harness, at $17.15 

30 logging sleds, at $70 

10 wagons, at $125 

Axes, saws, pea vies, chains, etc. . 

Landing ground 

Landing equipment 

Working capital* 

Total 



Initial 
investment 



$67,500 
2,000 
2,000 
1,050 
20,000 
5,000 
3, 600 
2,000 
2,000 
21,000 
2,400 
600 
2,100 
1,250 
3,000 
1,000 
1,200 

102,000 



239,700 



Number 

of years 
used. 



Annual 
deprecia- 
tion. 



$13,.->00 

400 

400 

210 

2,000 

1,000 

720 

400 

400 

3,000 

320 

80 

210 

100 

360 



160 



23,260 



Residual 
value. 



$10,000 



6,000 
800 
200 

1,050 
750 

1,200 

1,000 

400 

102,000 



123,400 



Averag* 
profit- 
bearing 
Investment. 



$40,500 

1,200 

1,200 

630 

16,000 

3,000 

1,800 

1,200 

800 

15,000 

1,760 

440 

1,680 

1,050 

2,280 

1,000 

880 

102,000 



192,420 



1 Each of the woods camns and branch roads to them will be in use but part of the total operation. 
• The calculation of working capital is given in detail on p. 68. 



APPRAISING STUMPAQE ON NATIONAL FORESTS. 67 

The operating costs for the various products are estimated as follows: 



Felling, bucking, hewing, etc 

Brush disposal and cutting defective timber 

Skidding 

Hauling to flume, including cost of temporary roads 

Fluming or driving to mill 

Sawing 1 

Fluming and driving to railroad and handling in yard.. 

Maintenance of improvements and equipment 2 

General expenses 2 



Total. 



Hewn ties, 
per piece. 



SO. 122 
.030 
.050 
.040 



.035 
.010 
.017 



Sawed ties, 
per piece. 



JO. 031 
.024 
.031 
.056 
.016 
.055 
.035 
.013 
.022 



.283 



Mine props, 
per piece. 



$0. 030 
.010 
.050 
.035 



.025 
.005 
.009 



Lumber, 

per 1,000 

feet. 



SI. 00 

.75 

1.00 

1.78 

.50 

2.50 

1.25 

.422 

.743 



9.944 



1 No overrun can be figured on account of the large part of the logs cut into ties, which are dealt with sepa- 
rately by the piece, and the inability to flume and market short lengths and low grades. 

J Under these items there is charged against each product only the expenditures for upkeep of improve- 
ments and equipment, supervision, inspection, office costs, etc., applicable to that part of the operation. 

The annual depreciation will be prorated over the net value of the year's cut; that 
is, the total margin between operating cost and selling price. This is: 



Product. 


Annual 
cut. 


Margin 
per unit. 


Total 
margin. 




do 


103, 680 

207,360 

144,000 

840 


SO. 266 

.317 

.136 

8.056 


S27,578.88 
65,733.12 




do.... 


19,584.00 




M feet.. 


6,767.04 




119,663.04 











The mill depreciation, $2,000, should obviously be borne by the mill products, 
lumber and sawed ties, exclusively. The remaining depreciation, $21,260, is charge- 
able to the entire cut. The depreciation charge for the several products is thus 
determined as follows: 

For the sawmill . 7 ^- L nf) ,„ =$0,028 per dollar of margin on lumber and sawed ties. 

$21 260 
For other improvements and equipment ^ ^ g 63 Q4 =$0. 178 per dollar of margin 

on the entire cut of all products. 

Depreciation on lumber, per thousand feet $1. 66 

Depreciation on sawed ties, per piece 065 

Depreciation on hewn ties, per piece 047 

Depreciation on props, per piece 024 

Adding depreciation to the operating costs, the total overturn for the respective 
products is: 

Hewn ties $0. 351 

Sawed ties 348 

Props 188 

Lumber 11. 604 

Twenty- five per cent of the overturn is believed to be a fair profit margin for hewn 
and sawed ties. These are contracted in advance in large quantities, are always in 
demand, and involve no market risk. The operation requires, however, an excep- 
tional amount of working capital and is subject to more than the ordinary logging 
risk on account of the possible shortage of water, delays in fluming, and hanging up 



68 



APPRAISING STUMPAGE ON NATIONAL FORESTS. 



of part of the year's cut. A profit margin of 35 per cent is deemed equitable on props 
and lumber. The market for this material ia uncertain, and much of it must often be 
carried in the yards for considerable periods before it can be sold. 
The stumpage prices are thus fixed as follows: 



Product. 


Overturn. 


Profit. 


Selling 
price. 


Stumpage 
rate. 




$0,351 
.348 
.188 

11.604 


$0. 08775 

.087 

.0658 

4. 0614 


$0.57 
.60 
.30 

18.00 


$0 13 



















The price of sawed ties is equivalent, at the ratio of 32 per thousand feet, to a log 
scale rate per thousand board feet of $5.31. Since both sawed ties and lumber are 
manufactured from logs too large for hewing, their respective prices may be averaged 
in the ratio of 54 to 7 (per cents in the total cut) at $4.97. 

The large amount of working capital required on account of the limited fluming sea- 
son adapts this chance to appraisal by the investment method more logically than by 
the overturn method. The need for a large working fund as well as considerable 
money for improvements makes the enterprise primarily capitalistic in nature. The 
requirements of the investment method would be met by a return of 20 per cent upon 
the average profit-bearing investment of $192,420. Twenty per cent is regarded as an 
equitable margin under the risks indicated. 

In estimating the working capital for this operation, it is assumed that the average 
date of delivering the year's cut at the railroad is August 1, the middle of the fluming 
season; and that wages are paid on the 15th of the month following that in which the 
work was done. 

The working funds required for logging must cover cash payments for stumpage, 
labor, horse feed, maintenance, and general expense throughout the cutting, skidding, 
and hauling seasons and carry these payments until the following August 1. The 
various expenditures may be tabulated by dates as follows, the number of months 
elapsing between each payment and the date of delivery being indicated: 



Date. 


Stumpage. 


Labor. 


Horse teed. 


Mainte- 
nance. 


General ex- 
pense. 


Total. 


Months 
carried. 




$5,000 










$5,000.00 
1,107.50 

11,441.27 
8, 625. 79 
5,000.00 
8, 188. 29 

19, 125. 79 
7, 125. 79 
5,000.00 
8,375.11 
8,312.61 

13,312.61 

4,075.84 

545. 00 

545.00 


14 


15. . . 






$500 
100 
825 


$607. 50 
545.00 
545. 00 


13J 
12* 

1!' 


July 15 


5,000 


$4,299.27 
5, 755. 79 


$1,500 
1,500 


Aug. 15 


Sept. 1 . . 


5,000 


15 


5, 755. 79 
5, 755. 79 
5,755.79 


1,500 
7,500 


325 
325 
825 


607. 50 
545. 00 
545.00 


10* 
91 

s 1 


Oct. 15 


5,000 


Nov. 15. . . 


Dec. 1 


5,000 




15... . 


7,542.61 
7, 542. 61 
7,542.61 
3, 243. 34 




225 
225 
225 
225 


607. 50 
545. 00 
545. 00 
607. 50 
545.00 
545.00 


7i 

i 

41 
31 
21 


Jan. 15 






Feb. 15 


5,000 




Mar. 15 




Apr. 15. . . 






May 15 . . . . 




















Total 


30,000 


53, 193. 60 


12,000 


3,800 


6,790.00 


105, 783. 60 









The labor bills paid on July 15 cover felling, bucking, hewing, etc., and brush dis- 
posal and cutting defective trees for one month's cut of each product; that is, for one- 
eighth of the annual cut. The wages paid in August, September, October, and No- 
vember cover the same items together with labor charges for one month's skidding. 
In the payments for December, January, and February, labor charges for hauling are 
included. The March payroll covers only the last month's hauling and skidding. 



APPRAISING STUMPAGE ON NATIONAL FOBESTS. 69 

The'cost of horse feed averages $1,500 per month for the eight months while skidding 
and hauling are in progress. It is necessary, however, to tote in the winter's supply 
in September; hence feed for five months is charged to the October expenditures. 
The expenditures for loose feed are included in the skidding and lumbering costs 
given on page 66. 

The payments for maintenance cover the salaries of a blacksmith at $75 per month, 
two assistant blacksmiths at $50 per month, and a harness maker at $50 per month. 
These men are employed for eight months, July 15 to March 15. Material for the 
blacksmith and harness shops costing $1,000 are also included in the payments for 
maintenance, one-half on August 15 and one-half on November 15; together with an 
expenditure of $1,000 for keeping the flume in repair. Five hundred dollars of the 
latter item are paid on June 15, the rest in installments of $100 during each of the suc- 
ceeding five months. 

Under "general expense" entries are charged the salaries of a foreman at $200 per 
month, a bookkeeper at the headquarters camp at $100, and a general agent and 
bookkeeper at the railroad yards at $125. These are year-round men paid off on the 
15th of each month. Other items charged to general expense are the premium on a 
$20,000 bond, amounting to $250 annually paid in quarterly installments, beginning 
June 15; rent for the office at the yards, at $20 per month; and $100 per month to cover 
miscellaneous items such as Belling lumber and props, check scaling, etc. 

By multiplying the expenditure in each month by the number of months until 
date of delivery and dividing the sum of these products by 12, the average working 
capital required for logging operations is found to be $80,176.53. 

Expenditures for milling, fluming, and driving are incurred during the five months' 
season from May 15 to October 15; and average as of August 1, the average date of 
delivering the year's cut at the yards. On August 1, thereforo, it can be fairly assumed 
that all milling, fluming, and driving charges have been paid, in addition to the 
stumpage and logging costs enumerated above. That is, an amount of working 
capital equivalent to the total annual expenditure for stumpage and operating costs 
is on that date invested in the year's cut. This amount is readily obtained for each 
product from the operating costs given on page 66 and the stumpage prices on page 67 
as follows: 

For hewn ties $44, 997. 12 

For sawed ties 92, 897. 28 

For props 30, 816. 00 

For lumber 10, 310. 16 

Both kinds of railroad ties will be sold and paid for within an average of one month 
after delivery. It is not probable that payment for props and lumber, however, 
will be received in less than an average of three months A yearly fund of working 
capital equivalent to one-twelfth of the total coBt of the railroad ties and one-fourth 
that of the other products is therefore needed to carry yard stock from date of delivery 
to date of sale. This amount is $21,772.74 which, added to the working capital UBed 
in logging, makes the total for the operation, $101,949.77. 



APPENDIX. 



FORM FOR SUMMARIZING THE ESSENTIAL DATA IN STUMPAGE 

APPRAISALS. 

The use of the following summary in outline form is desirable to present concisely 
the more essential features of the appraisal. This summary Bhould be prefixed to all 
reports submitted to the Forester: 

1. The sale area. 

(1) District, Forest, main watershed or other descriptive location, designation of 

sale or chance. 

(2) Area covered by appraisal (acres). 

(3) Distance from chance to common carrier, or local market, by proposed logging 

road, flume, drivable stream, etc. (method of transportation and miles). 

(4) The stand: 

a. Total estimated cut (thousand feet). 

b. Name and per cent of each species. 

c. Kind and per cent of each product to be cut (saw logs, ties, mine props, 

etc.). 

2. Investments. 

(1) Name main units (railroad or flume with length, sawmill with capacity, etc.). 
(2^ Average fixed investment. (Profit-bearing.) 

(3) Annual depreciation. 

(4) Average working capital. 

(5) Total average investment in operation. 

3. Cost of production (per thousand feet log scale, piece or other unit; separately by 

species or products as required). 

(1) Depreciation. 

(2) Logging. 

(3) Manufacture. 

(4) General Expense. 

(5) Forest Service requirements. 

(6) Total. 

4. Profit margin. 

(1) Estimate of risk (low, average, high). 

(2) Method used (investment, overturn, pay for personal services). 

(3) Rate. 

(4) Profit in dollars and cents (per thousand feet log scale or other unit of output). 

5. Selling price (per thousand feet log scale, piece, or other unit; separately by species 

and products as required). 

6. Recommended stumpage price (per thousand feet log scale, piece, or other unit; 

separately by species and products as required). 

7. Important contract terms. 

(1) Cutting period. 

(2) Construction period. 

(3) Other terms which materially influence the appraisal. 

70 

O 



LIBRARY OF CONGRESS 




